Oil Speculators’ Dirty Tricks Exposed
Whistleblowers say congressional cap on dirty dealings would force prices down further
By Christopher J. Petherick
Is the price of oil really determined by decreasing supply and increasing demand, or are financial speculators manipulating the markets for their monetary gain? With the early August drop in prices, speculation about speculators “gaming the system” makes a lot more sense than supply-and-demand dynamics shaping the market.
Evidence of speculators manipulating prices came in the last week of July when the Commodity Futures Trading Commission (CFTC), the government regulatory body tasked with policing futures markets, charged
Optiver Holding, two of its subsidiaries and three employees with “manipulation and attempted manipulation of crude oil.”
According to the CFTC, Optiver was attempting to corner the market on crude. It had “amassed large trading positions,” said a spokesman for the CFTC, “then conducted trades in such a way [as] to bully and hammer the markets.”
Optiver just happens to be one of “dozens” of companies the CFTC is currently investigating.
The vigor with which regulatory bodies are checking up on traders stems from calls in Congress to look into commodity trading firms driving up prices. The bottom line is traders at Optiver had done what many suspect is common practice in oil markets today—they purchased large numbers of oil futures contracts just before markets closed, forcing prices up. They then sold them quickly to push prices down. Ultimately, the traders profited off the difference.
But in reality, it’s more complicated that that. Investment dollars have figuratively been flooding commodities markets as hedges against the falling dollar and the volatile stock market. An unusual meeting of the minds between airline executives, consumer advocates and oil experts has redirected attention to the uncanny correlation between a fourfold increase in investment dollars in the oil futures market and a fourfold increase in the price of oil.
Experts chalk up some of the confusion over the role speculation plays in determining oil prices to legislation in 2000, which passed after significant lobbying on the part of energy giant Enron. Known as the Enron loophole, this highly questionable measure enacted by Congress allowed energy securities to be traded outside the New York Mercantile Exchange and without any oversight.
These securities now comprise a portion of the estimated $300 trillion in derivatives that are being traded on global markets. Greed governs in these dangerous speculative games, and the recent mortgage meltdown is a shining example of why bankers and global speculators can never operate on the honor system alone.
So who is right? Are speculators to blame, or is it supply and demand?
On July 11, Tyson Slocum, the director of the energy program at Public Citizen, explained it this way to the House Committee on Agriculture:
“There is no question that speculators and unregulated energy traders have pushed prices far beyond the supply-demand fundamentals and into an era of a speculative bubble in oil markets.”
Slocum pointed to firms like Goldman Sachs, which “invest in and acquire significant physical oil assets like refineries and pipelines while holding substantial positions in the futures markets. . . . Controlling these assets affords a company’s energy trading affiliates an ‘insider’s peek’ into the physical movements of energy products unavailable to other energy traders.”
They can then game the system legally, reaping huge profits for themselves and their clients and sticking the American public with the tab.
So how much of the $100-plus cost of a barrel of oil is directly related to speculative forces? Speculators can buy up large amounts of oil and then sell them to each other again and again. A barrel of oil may trade over 20 times before anyone actually touches it. With each trade, the price goes up.
In an open letter to the public, airline executives placed the speculator effect to as much as $30 to $60 per barrel.
Some whistleblowers say they expect prices to drop significantly if Congress puts a cap on speculation. In testimony before Congress, hedge fund manager Michael Masters said that gasoline prices could fall to $2 a gallon if legislators would simply pass a measure like the one proposed by Germany’s leaders, which would curb global trading by speculators.
There are a number of bills pending in Congress which would do such a thing. Rep. Bart Stupak (DMich.) recently introduced an updated version of a bill called the PUMP Act, or Prevent Unfair Manipulation of Prices Act.
The measure would close loopholes that facilitate the manipulation and inflation of the price of energy. “By closing all of these loopholes,” said Stupak, following the introduction of his bill, “CFTC would be better able to monitor trades to prevent manipulation and help eliminate the unreasonable inflation of energy prices, helping protect American consumers.”
Christopher Petherick is a journalist and publisher based in Maryland. For more information, see his website at www.brandywinehouse.us or write directly to BRANDYWINE HOUSE BOOKS AND MEDIA, P.O. Box 638, Cheltenham, MD 20623.
(Issue # 34, August 25, 2008)