By Mike Whitney
24/06/08 "ICH" -- -- I've seen this bad movie before. It's the Enron movie, which hit the West Coast power-markets like a bomb because the federal government was asleep at the switch. Now it's happening again with oil prices." Rep. Jay Inslee D-WA
There is no oil shortage, not yet at least. That doesn't mean we're not quickly sliding towards Peak Oil. We probably are, but that has nothing to do with today's gas prices. The reason oil has skyrocketed to nearly $140 per barrel is because of speculation; rampant, "unregulated" speculation. The peak oil doom-sayers are simply confusing the issue. This is not about shortages or scarcity; it's about gaming the system to fatten the bottom line. The whole scam is being executed with excruciating precision by the same carpetbagging scoundrels who engineered the subprime fiasco; the investment bankers. The Wall Street Goliaths are using the futures market to recapitalize their flagging balance sheets after sustaining massive losses in the mortgage-backed securities boondoggle. That's the whole thing in a nutshell. Now they're on to their next swindle; distorting the futures market with humongous leveraged bets on food and oil.
MarketWatch summed it up like this on Monday:
NEW YORK (MarketWatch) -- Speculators now account for about 70% of all benchmark crude-oil trading on the New York Mercantile Exchange, up from 37% in 2000, according to congressional findings cited in a Wall Street Journal report Monday. The report comes ahead of a House oversight subcommittee hearing slated for later Monday on Capitol Hill to study the role of financial investors in the crude futures market. There has been much discussion recently about how big a role so-called speculators have been playing in the sharp rise in energy prices, though no consensus has emerged on this point.
Congress, however, has grown increasingly concerned over speculative investors' role in the energy market in comparison with those buying futures contracts to hedge against risk from price changes. Lawmakers are expected to consider legislation to set strict limits -- or in some cases, an outright ban -- on speculative trading in energy futures in some markets, the Journal reported.
In 1991, the Commodity Futures Trading Commission authorized the first exemption from position limits for swap dealers with no physical commodity exposure, the report said. This began what Dingell said was "A PROCESS THAT HAS ENABLED INVESTMENT BANKS TO ACCUMULATE ENORMOUS POSITIONS IN COMMODITY MARKETS," according to the report. (MarketWatch)
So its not really Big Oil or "greedy Arabs" after all? Nope, it's the cutthroat banksters again.
WHAT HAPPENED IN JIDDAH
Over the weekend, Saudi Arabia's King Abdullah convened an emergency Oil Summit in Jiddah, Saudi Arabia to deal with the disastrous effects that oil prices were having on the global economy. Rising prices are responsible for everything from food riots in Haiti to truckers strikes in Spain, Portugal and France. US Energy Secretary Samuel Bodman delivered a prepared statement supporting the Bush administration's position on the issue:
"Market fundamentals show us that production has not kept pace with growing demand for oil, resulting in increasing -- and increasingly volatile -- prices. Even despite higher global production for oil so far this year, inventories have been drawn down and current world production (spare) capacity is below historic levels -- at fewer than two million barrels per day."
Demand is not out-pacing supply. That's a myth started by the people who are profiting by betting up oil futures; investment bankers. They're led by their chief defender and former G-Sax scalawag, Henry Paulson.
Consider the remarks of Philip Davis in a recent post at Seeking Alpha:
"Now we have the Saudi oil summit this weekend and Saudi Arabia took 1.5M barrels a day off-line since July of ‘05 in a series of cuts and is currently producing just over 8Mbd out of their estimated 10.5Mbd maximum capacity. It is forecast by the EIA that next year OPEC alone will have over 3Mbd of spare capacity so this would be a terrible time for global demand to take a nose dive or there are going to be a lot of idle wells… Should global demand drop another 5% in the next 12 months, we could be looking at 8Mbd less demand than there was just a year ago.
As the London Telegraph points out, not only does OPEC have a current production surplus of 2M barrels a day but that surplus will rise to 3.5M barrels a day BY NEXT YEAR. Also, non-OPEC production is rising fast with a 1.5Mb gain in non-OPEC production coming down the pike next year. ...Iraq, by the way, is no longer included as OPEC or non-OPEC production, a very clever way to hide 2.4 million barrels of production by the energy apologists." (Philip Davis, "The Oil Shortage, and Other fairy Tales" Seeking Alpha) http://seekingalpha.com/article/78440-the-oil-shortage-and-other-fairy-tales
There's no shortage, no scarcity. In fact, oil is being deliberately kept off the market to keep prices high. Consider this: if supply isn't keeping up with demand then why aren't there any lines at the gas stations like there were during the '70s?
Because it's all a fabrication. Prices are up because of speculation; that's all.
Here's what Saudi Arabia's King Abdullah's said on Sunday: "Among other factors behind this unjust increase in oil prices is the abhorrent acts of speculators seeking to undermine the market." That's why he called the meeting to begin with. The King insists that "speculators" have played a key role." (AFP)
How about Kuwait?
The Kuwaiti Oil Minister Mohammed al-Olaim insisted that "there is enough oil to supply the market....We believe that the market is in equilibrium. The price is disconnected from fundamentals. It is not a problem of supply. Why would you have a supply problem WHEN DEMAND IS GOING DOWN". (AP)
Of course, demand goes down in a recession.
What about Libya?
"We believe speculation has its impact," the OPEC chief said. Libya may reduce its oil production because THERE IS MORE THAN ENOUGH OIL ON THE MARKET Oil Minister Shokri Ghanem said. "We may have to cut production.... We don't see any need for more oil. There is plenty of oil in the market,'' Ghanem said, commenting on Saudi Arabia's decision. (Bloomberg News)
How about Iraq? Can we at least count on our brothers in Iraq to maintain the administration's falsehoods about supply problems?
According to Reuters: Iraq's Oil Minister Hussain al-Shahristani said, "Any increase in world oil output would not have a significant impact on record-high crude prices that are being driven by speculation... Regulations needed to be introduced to stabilize oil markets. I do not think increasing any amount in the international market will have a significant impact on the prices. It is up to the stock exchange and the regulations in the industrialized nations. It is not something OPEC can contribute to. We did not see any impact on the prices from the Saudi's previous increase." (Reuters)
Venezuela Oil Minister Rafael Ramirez refused to join the weekend conference because "We believe it is not necessary to increase output...Oil production levels aren't behind the increase in prices," Ramirez said adding that soaring oil prices were caused by 'speculative interest, a falling dollar and global inflation'. (Reuters)
So, are all the oil ministers lying or is the Bush administration intentionally misleading the public about supply problems?
Its always easy to point the finger at Big Oil or "greedy" Arabs for price gouging, but that's not what's really going on. The Bush administration is colluding with their Wall Street buddies to fleece the public by inflating another bubble; this time in commodities. It's just way of further enriching the wealthy at the expense of working people. Meanwhile the middle class continues to get hammered by soaring food and fuel costs and a steadily deteriorating standard of living.
Congress could end this charade in a minute by passing legislation that would close the Swaps Loophole and require steeper margin limits on oil futures. But don't hold your breath. Wall Street is the biggest contributor to political campaigns which explains how we got into this pickle to begin with. It also explains why Congress's public approval rating has shriveled to a measly 12 per cent.
Do Bush and Bernanke know what the banks are up to? Do they know that billions that are being loaned to the banks via the Fed's "auction facilities" are probably being diverted into the commodities market and driving up the prices of raw materials and oil, while pushing the world towards global recession?
You bet they do and they're probably doing everything in their power to keep the banking system from buckling beneath the weight of its own massive debts.
Here's an excerpt from Spiegel Online "Are Pension Funds Fueling High Oil? which explains the whole scam:
"Commodities exchanges limit the number of positions an investor can take in the market, but Michael Masters, of Masters Capital Management, says the Commodity Futures Trading Commission has allowed unlimited speculation in these markets through a loophole. This so-called SWAPS LOOPHOLE EXEMPTS INVESTMENT BANKS LIKE GOLDMAN SACHS AND MERRILL LYNCH FROM REPORTING REQUIREMENTS AND LIMITS ON TRADING POSITIONS THAT ARE REQUIRED OF OTHER INVESTORS. THE LOOPHOLE ALLOWS PENSION FUNDS TO ENTER INTO A SWAP AGREEMENT WITH AN INVESTMENT BANK WHICH CAN THEN TRADE UNLIMITED NUMBERS OF THE CONTRACTS IN FUTURES MARKETS."
"Some experts fault the CFTC, charged with regulating commodities markets, for allowing such loopholes. "Congress has provided the CFTC the power to control this unlimited [speculation]; the law is very specific about establishing position limits," says Steve Briese, author of The Commitments of Traders Bible and CommitmentsOfTraders.org, a site that focuses on US futures markets. "The problem is they have abdicated this role." The dramatic surge in energy prices has helped to spark inflation across the economy and, as others at the hearing testified, has cut into profits of most in the supply chain. Briese points to Treasury reports that the THE TOP FIVE USERS OF SWAP AGREEMENTS ARE INVESTMENT BANKS, FOUR OF WHICH DOMINATE SWAP DEALING IN COMMODITIES AND COMMODITIES FUTURES: Bank of America, Citigroup, JP Morgan Chase, HSBC North America Holdings, and Wachovia. (Spiegel Online)
The bloody footprints lead straight to Wall Street.
Here's more proof.
Citing the harmful impacts record high crude oil prices are having on consumers, US Rep. Bart Stupak (D-Mich.) introduced a bill to close regulatory loopholes:
"The numbers back this up: Between Sept. 30, 2003, and May 6, 2008, contracts held by traders jumped from 714,000 to more than 3 million, a 425% increase. Since 2003, commodity index speculation has increased 1,900% from an estimated $13 billion to $260 billion invested. Stupak said CFTC data show that in 2000, physical hedges that airlines and other businesses use to ensure a stable price for fuel in coming months and actually imply delivery, accounted for an estimated 63% of the total futures market, while speculators represented about 37%. "By April 2008, physical hedgers only controlled 29% and speculators had taken over a whopping 71% of the oil futures market."
He said 85% of the futures purchases tied to commodity index speculation comes through swap dealers—investment banks that serve as intermediaries for their pension fund and sovereign wealth fund customers. One report found that $55 billion of total worldwide commodity trading over 55 days came in as swaps. "The CFTC has allowed 117 exceptions to swaps. When that many exceptions are allowed, they are not really subject to oversight. We have a CFTC that's supposed to be doing its job. I'm not certain that it is," he said. ("Oil and Gas Journal" Texas
ANOTHER SMOKING GUN
On May 20, 2008 Michael Masters, testified before the Senate Committee on Homeland Security and Governmental Affairs, on the role that speculation has played in recent commodity price movements. He said:
"In the popular press the explanation given most often for rising oil prices is the increased demand for oil from China. According to the DOE, annual Chinese demand for petroleum has increased over the last five years from 1.88 billion barrels to 2.8 billion barrels, an increase of 920 million barrels. Over the same five-year period, INDEX SPECULATORS DEMAND FOR PETROLEUM FUTURES HAS INCREASED BY 848 MILLION BARRELS. The increase in demand from Index Speculators is almost equal to the increase in demand from China!"
Masters is right; there is massive speculation which is distorting the market, but who is responsible? Clearly, the pension fund managers aren't to blame. After all, the largest US pension funds, which is the California Public Employees Retirement System (CalPERS), has only invested about $1.1 billion in commodities swaps contracts. That's a far-cry from $260 billion. The investment giants and hedge funds are probably leveraging the money they receive from the pension funds many times over to increase the size of their bets. Keep in mind, oil futures can be purchased for a mere $.06 on the dollar; that's a lot of potential leverage.
Masters again: "Commodities prices have increased more in the aggregate over the last five years than at any other time in U.S. history. We have seen commodity price spikes occur in the past as a result of supply crises, such as during the 1973 Arab Oil Embargo. But today, unlike previous episodes, SUPPLY IS AMPLE: there are no lines at the gas pump and there is plenty of food on the shelves. Today, Index Speculators are pouring billions of dollars into the commodities futures markets, speculating that commodity prices will increase."
Index Speculators have now stockpiled, via the futures market, the equivalent of
1.1 billion barrels of petroleum, effectively ADDING EIGHT TIMES AS MUCH OIL TO THEIR OWN STOCKPILE AS THE UNITED STATES HAS ADDED TO THE Strategic Petroleum Reserve over the last five years:
"We calculate that Index Speculators flooded the markets with $55 billion in just the first 52 trading days of this year. That’s an increase in the dollar value of outstanding futures contracts of more than $1 billion per trading day.
Doesn’t it seem likely that an increase in demand of this magnitude in the commodities futures markets could go a long way in explaining the extraordinary commodities price increases in the beginning of 2008?"
Yes, it does. And it also explains where billions of dollars from the Fed's "auction facilities" are going. After all, they're certainly not going into mortgage-backed securities anymore, and MBS represented nearly 70 per cent of bank revenue. So, where would a desperate banker turn if his main revenue-stream had dried up and the corporate bond market was frozen solid?
How about oil futures and commodities; the only game in town?
Why would an investment banker care if the economy tanks and people in Asia starve? That's not his problem. His job is to keep the shareholders happy, right?
As the MarketWatch article suggests, oil prices are inflated by about 70 per cent. Bernanke could stop Wall Street's feeding frenzy in short-order by just raising interest rates by 50 basis points at the next FOMC meeting on Wednesday. That would poke a hole in the oil bubble and send the speculators scuttling for the exits. But don't count on it. There's as much chance that Bernanke will do the right thing as there is of Congress actually doing their job. Only a fool would take that bet.
By Mike Whitney