Archive for May, 2008

McCain Defends ‘Enron Loophole’ keepen us safe from gays and terrorist.

May 30, 2008

By Jason Leopold

Sen. John McCain says he opposes the $307 billion farm bill because it would dole out wasteful subsidies, but his chief economic adviser Phil Gramm also wants to stop its proposed regulation of energy futures trading, a market that was famously abused when Enron Corp. manipulated California’s electricity prices in 2001.

Clearing the way for that California price gouging, Gramm, as a powerful Texas senator in 2000, slipped an Enron-backed provision into the Commodities Futures Modernization Act that exempted from regulation energy trading on electronic platforms.

Then, over the next year, Enron – with Gramm’s wife Wendy serving on its board of directors – worked to create false electricity shortages in California, bilking consumers out of an estimated $40 billion.

Gramm left the Senate in 2002 but now has emerged as what Fortune magazine calls “McCain’s econ brain,” not only filling the Arizona senator’s acknowledged void on economic expertise (“I don’t know as much about the economy as I should”) but recognized as one of McCain’s closest friends in politics. The two men talk daily.

A McCain aide told me that the Arizona senator opposes the farm bill because it “rewards lobbyists” by granting rich farmers lucrative subsidies, although he would support “a reasonable level of assistance and risk management to farmers when they need America’s help.”

But the aide, who spoke on condition of anonymity, acknowledged that the presumptive Republican presidential nominee also opposes the farm bill because Gramm advised McCain that he should resist its regulatory language on the energy futures market.

Democrats have dubbed that gap in energy futures regulation the “Enron loophole,” but it played a part, too, in the more recent attempt by the Amaranth Advisers hedge fund to corner the national gas market by shifting trades to the unregulated “dark markets” of the Intercontinental Exchange.

The “Enron loophole” also has become part of the debate over the soaring price of oil. Last week, a study sponsored by Sen. Carl Levin, D-Michigan, concluded that speculative futures markets were partly to blame for the surge in oil prices that have pushed gas at the pump toward $4 a gallon.

At a May 15 news conference, Levin said the skyrocketing price of oil is “not the result of supply and demand. Speculators have taken over most of the futures market.”

However, the 673-page farm bill, containing the regulatory provisions on electronic energy trading, still faces obstacles amid overall concerns about the bill’s largesse to farmers at a time of rising food prices.

President George W. Bush has vowed to veto the bill, although it cleared the House and Senate by margins wide enough for an override, assuming Republicans don’t rally behind Bush and McCain, their current and future standard bearers.

Gramm and Enron

The battle over the “Enron loophole” also could draw attention to McCain’s dependence on Gramm as his chief economic adviser and Gramm’s key role in passing legislation that let Enron trade commodities on electronic platforms without federal oversight.

In 2000, with the Republicans in charge of Congress and Gramm chairing the Senate Banking Committee, the exemption on electronic trading was approved without a Senate hearing.

Internal Enron documents, which were released in 2002, revealed that the Houston-based company helped write the legislation, which was signed into law by President Bill Clinton in December 2000.

Freed from regulatory interference, Enron then used manipulative trading practices to game the California electricity market and drive up electricity prices across the state.

While California consumers were getting fleeced, the new Bush administration shielded Enron from early accusations of market manipulation. President Bush personally joined the fight against imposing caps on the soaring price of electricity, buying additional time for Enron although the company’s house of cards collapsed anyway in fall 2001. [For details, see Consortiumnews.com’s “Bush’s Enron Lies.”]

In 2006, the “Enron loophole” allowed Amaranth Advisers hedge fund to shift its trades from the regulated New York Mercantile Exchange (NYMEX) to the unregulated Intercontinental Exchange (ICE) in Atlanta.

That let Amaranth corner the natural gas market, betting that futures prices would rise. The hedge fund lost about $6 billion and imploded as natural gas prices fell to a two-year low in September 2006.

Last July, the Federal Energy Regulatory Commission and the Commodity Futures Trading Commission charged that Amaranth manipulated prices paid in the physical natural gas markets. FERC has proposed $291 million in penalties and the forfeiture of “unjust profits.”

“Unregulated markets are known as ‘dark markets’ because there is very little oversight of the trades,” said Rep. Bart Stupak, D-Michigan, chairman of the subcommittee on Oversight and Investigations, during a hearing on energy speculation last December.

By trading on the “dark” ICE market, traders can avoid the Commodity Futures Trading Commission’s rules which are in place to prevent price distortions or supply squeezes.

Stupak said trading volumes on ICE “have skyrocketed in the past three years and are now as large or even larger in some months, than the volumes traded on the regulated futures market.”

The lack of oversight “makes it difficult for regulators to detect excessively large positions which could lead to price manipulation,” Stupak said.

Advising McCain

Gramm, who is now a vice chairman of financial services company UBS, began advising McCain in 2005 when the Arizona senator indicated he planned to run for President.

Since then, McCain has adopted much of Gramm’s anti-tax, anti-regulatory agenda. Most strikingly, McCain shifted to support Bush’s tax cuts, which McCain had voted against in 2001 and 2003. He now vows that, if elected President, he would make them permanent.

Yet Gramm’s influence over McCain’s economic agenda – and the checkered political-business history of Gramm and his wife Wendy – have largely escaped media scrutiny.

Gramm received more than $34,000 in campaign contributions from Enron and served as one of the company’s key legislative allies in Washington, including his help in 2000 removing federal oversight from energy trades on electronic platforms.

At the height of the Enron scandal in January 2002, Gramm’s press secretary Larry Neal told The New York Times that Gramm did not “recall a conversation” he apparently had with Enron’s chairman Ken Lay in 2000 to discuss that Enron legislative priority.

An internal Enron e-mail dated Aug. 10, 2000, under the subject “CFTC Reauthorization” – sent by Enron’s top lobbyist Richard Shapiro to Steve Kean, Enron’s executive vice president – said the company needed to get Lay on the phone with Gramm so the bill could be passed.

“The bill is not moving quickly in the Senate due to Senator Phil Gramm’s desire to see significant changes made to the legislation (not directly related to our energy language),” Shapiro said.

“Last week at the [2000] Republican Convention, I asked the Senator about the bill and he said they were working on it, but much needs to be changed for his support. More telling perhaps, were Wendy Gramm’s comments that she would rather the current bill die if a better bill can be passed next year.

“What this means is that we must, at the least, remove Senator Gramm’s opposition to the bill to move the process and more importantly seek to gain his support of the legislation.”

Shapiro added: “However, with less than 20 or so legislative days left, we need Senator Gramm to engage.

“A call from Ken Lay in the next two weeks to Senator Gramm could be an impetus for Gramm to move his staff to resolve the differences. Gramm needs to fully understand how helpful the bill is to Enron.

“Let me know your thoughts on this approach. I am prepared to assist in coordinating the call and drafting the talking points for a Ken Lay/Sen. Gramm call.”

Several other internal Enron e-mails briefed company staffers on the status of Gramm’s position and Enron’s lobbying of the senator. Gramm finally removed a “hold” on the bill in December 2000, reintroduced the bill under a different number, and forced a vote on it without floor debate.

It was then attached to an appropriations bill that was signed by President Clinton on Dec. 21, 2000.

California Crisis

Less than a month later, California began to experience rolling blackouts due to artificial electricity shortages which, according to documents later released by federal energy regulators, were the result of manipulative trading practices employed by Enron.

The California crisis centered on Enron’s energy trades through a new platform called EnronOnline, which had been freed from regulatory oversight by the legislation pushed by Gramm.

In April 2002, Gramm blocked an amendment by Sen. Dianne Feinstein, D-California, that would have closed the loophole that Gramm had helped open.

Gramm’s wife, Wendy, also had played a role in the anti-regulatory policies that contributed to the Enron scandal.

On Jan. 14, 1993, in the final days of the first Bush administration, Wendy Gramm – as chairwoman of the Commodity Futures Trading Commission – pushed through a key regulatory exemption removing energy derivatives contracts and interest-rate swaps from federal oversight.

That was a major financial boon to Enron, where Wendy Gramm landed five weeks later as a member of the board of directors. She also became a member of the audit committee that signed off on another one of Enron’s fraudulent schemes, partnerships that hid the company’s growing debt.

Even after Enron had collapsed in fall 2001, Sen. Gramm continued to resist congressional efforts at tightening up the rules.

In 2002, despite the accounting scandals at Enron, WorldCom and other major companies, Sen. Gramm objected to the Sarbanes-Oxley corporate reform bill designed to hold executives accountable for inaccuracies in financial reports.

Now, the Gramm family’s anti-regulatory agenda is returning via McCain’s presidential campaign.

As Fortune’s editor-at-large Shawn Tully wrote, “economic conservatives should take heart. McCain’s chief economic adviser – and perhaps his closest political friend – is the ultimate pure play in free market faith, former Texas Sen. Phil Gramm. … Most of [McCain’s] current positions are vintage Gramm indeed.” [Fortune, Feb. 19. 2008]

The first test of McCain’s commitment to Gramm’s anti-regulatory purity may come in the looming battle over the “Enron loophole” that the farm bill seeks to close.

Jason Leopold has launched a new Web site, The Public Record, at http://www.pubrecord.org

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The US-Iran sound bite showdown

May 20, 2008

By Pepe Escobar

They just can’t keep from going at each other’s throats.

Just in time for President George W Bush’s special guest appearance at the 60th anniversary of the founding of Israel, his ultimate nemesis, Iranian President Mahmud Ahmadinejad, unleashed another rhetorical shot across the bow as his own way of “celebrating” the anniversary.

And once again the substance of what Ahmadinejad actually said risks being lost in (mis)translation.

According to Agence France Presse (AFP), quoting the Fars news agency, Ahmadinejad, speaking in the Iranian northern province of Golestan in one of his popular provincial tours, said, “They [Israel] must know that the nations of the region hate this

counterfeit regime. And if there is the slightest chance, they will uproot this counterfeit regime.”

Reuters had a much more bellicose take. According to its translation, “They [Israel] should know that regional nations hate this fake and criminal regime and if the smallest and briefest chance is given to regional nations they will destroy it.”

It is hardly a secret that for a substantial majority of Arab populations in the Middle East – but not for their unrepresentative regimes – an Israel driven by Zionism should not have a place in the region. Thus Israel would qualify as a “counterfeit” regime that should be “uprooted”. But this does not mean that Arabs – or Persians – are in favor of the actual physical destruction of Israel.

The Associated Press’s (AP) version of the quote is even more apocalyptic. It reads: “The criminals assume that by holding celebrations … they can save the sinister Zionist regime from death and destruction.” The AP copy notes, “Ahmadinejad used an Arabic word, ismihlal, than can also be translated as destruction, death and collapse.” An Arabic expert contacted by Asia Times Online said ismihlal means basically “to break down in smaller parts”. That’s not exactly nuclear annihilation.

We are back to the situation of Ahmadinejad’s 2005 alleged threat to “wipe Israel off the map”. What he actually said then, quoting his personal icon, the leader of the Islamic revolution in 1979, ayatollah Ruhollah Khomeini, was that the “regime occupying Jerusalem should vanish from the pages of time”. Yes, this means regime change – as much as the Bush administration always wanted regime change in Tehran. It does not mean a call for a nuclear holocaust.

Now, the fact remains that the Reuters translation – distributed to countless newspapers all over the world – will inevitably be seized by the Bush administration and assorted armchair neo-conservative warriors as yet more evidence that Iran wants to “destroy” Israel – muscling up the case in Washington for a preemptive US attack on Iran.

This week, Philip Giraldi published a groundbreaking story on the American Conservative, according to which the US National Security Council (NSC) has agreed – in principle – on a cruise missile strike against an Iranian Revolutionary Guards Corps Quds Force training camp near Tehran. This would be a sort of “warning” to the Iranian leadership. The only NSC member to urge for a delay was allegedly Defense Secretary Robert Gates. Giraldi carefully noted that Bush “will still have to give the order to launch after all preparations are made”. But the decision to attack seems to have been made.

Annihilation a-go-go
Juicy extras are inevitable when it comes to Ahmadinejad’s runaway tongue at ease in cozy provincial settings. What AFP translates as “the Zionist regime is on the verge of dying … throwing a birthday party for this regime is like having a birthday party for a dead person”, Reuters prefers to package as “the Zionist regime is dying. The criminals imagine that by holding celebrations … they can save the Zionist regime from death”.

But in this case it was up to APTN, the video arm of AP, to provide the meatier translation: “The criminals wrongly suppose that by holding celebrations, coming to the occupied lands of Palestine and supporting these criminals, they can save the resented Zionist regime from death, annihilation and from the claws of Palestinian fighters.”

This is as contextual as what Ahmadinejad had said a day before, in a press conference in Tehran. According to the Deutsche Presse Agentur, the German news agency, he said, “This terrorist and criminal state is backed by foreign powers, but this regime would soon be swept away by the Palestinians.” And he added, “As far as the regional countries are concerned, this regime does not exist.” This is better in terms of framing the anger expressed by Ahmadinejad – as well as the theocratic leadership in Tehran, and most of the Arab world for that matter – towards Israel as a direct consequence of Israel’s mistreatment of Palestinians.

It is interesting to note that for the Iranian press, the references to Israel were not even on the map. Press TV, for instance, went with the headline “Ahmadinejad: Tyranny falling from grace”, stressing other parts of the president’s speech, for instance when he said that “tyrannical powers have fallen from grace and the sound of their cracking bones can be heard”.

Whatever Ahmadinejad said, Bush, for his part, totally stuck to script. Even before his arrival in Jerusalem on Wednesday, Bush commented that “the message to Iran is that your desire to have a nuclear weapon, coupled with your statements about the destruction of our close ally, have made it abundantly clear to everybody that we have got to work together to stop you from having a nuclear weapon. To me the single-biggest threat to peace in the Middle East is the Iranian regime.” Once again, a call for regime change.

To add fuel to the fire, Saudi Arabia’s Foreign Minister Prince Saud al-Faisal – in synch with Washington – started accusing Iran of backing a Hezbollah coup in Lebanon. That is predictable, considering that the Hariri clan in Beirut is a Saudi client. But nothing could be further from the truth. Last week, Hezbollah’s leader Hassan Nasrallah was blunt: “Had we wanted a coup, they [government leaders] would have woken up to find themselves in jail, or [thrown) in the sea.”

Nasrallah was cunning enough to see it would be politically impossible for Hezbollah to control Beirut – even though they proved they could do it, on the ground with weapons, in less than 24 hours. Nasrallah also said last week, “If they told us to come and take over, we would say ‘no thank you’.”

There is no evidence the celebrity sound bite showdown will abate any time soon. Bush appears to want war – to bolster his “legacy”. Ahmadinejad, too, might want war to bolster his faltering administration. American and world public opinion can only hope the clock does not run out before a possibly upcoming changing of the guard in the White House.

Just as the rhetoric between Tehran and Washington was once again at red alert levels, former Democratic presidential candidate Senator John Edwards stepped into the ring to announce his endorsement of Democratic Senator Barack Obama in the US presidential race – sucking out the hate waves. “Walls” inside and outside the US may soon come tumbling down, as Edwards hinted in his speech. But the fact remains that the hardline faction in the Bush administration centered around Vice President Dick Cheney still has over five months to fulfill its agenda of regime change in Iran. And the danger is Ahmadinejad will do absolutely nothing to dissuade them.

Pepe Escobar is the author of Globalistan: How the Globalized World is Dissolving into Liquid War (Nimble Books, 2007) and Red Zone Blues: a snapshot of Baghdad during the surge. He may be reached at pepeasia@yahoo.com.

Perhaps 60 percent of today’s oil price is pure speculation

May 8, 2008


By F. William Engdahl

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 percent 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 crucial 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.” [1]

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 trending 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 percent 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 percent 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 US Treasury Secretary Henry Paulson is a former chairman of Goldman Sachs.

[1] United States Senate Premanent Subcommittee on Investigations, 109th Congress 2nd Session, The Role of Market speculation in Rising Oil and Gas Prices: A Need to Put the Cop Back on the Beat; Staff Report, prepared by the Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs, United States Senate, Washington D.C., June 27, 2006. p. 3.

F. William Engdahl is author of “A Century of War: Anglo-American Oil Politics and the New World Order. He may be contacted at info@engdahl.oilgeopolitics.net.

What will History Say About Today’s America?

May 3, 2008

What will History Say About Today’s America?
by Brian Trent
Imagine what America’s legacy will look like in a history book some 500 years hence. I can easily see some golden opening chapters where the dream of a democratic Republic – straight from Greco-Roman ideals – is realized. The nation which began bold and bright – breaking away from the tyranny of the British crown, rising to global dominance, and becoming a leader the rest of the world looked to, then comes to the 21st century… (read more)