Update: Action Alert!
Phil Gramm, the Enron Loophole, and oil speculators on Wall Street
Posted by AzBlueMeanie:
Remember this past summer when John McCain and his Republican goons were blaming high gas prices on a shortage of oil supplies in the world, and chanting "drill baby drill"? As I wrote at the time, the surge in gas prices had nothing to do with actual supply and demand but was driven by rampant speculation among investors in the commodity futures trading markets and unregulated spot oil markets.
CBS' 60 Minutes aired a must-see report on Sunday confirming that it was speculators, not supply and demand, that was responsible for the surge in gas prices. 60 Minutes: Speculation Affected Oil Price Swings More Than Supply And Demand Correspondent Steve Kroft reported it was a speculative bubble, not unlike the one that caused the housing crisis, that had more to do with traders and speculators on Wall Street than with oil company executives or sheiks in Saudi Arabia.
Dan Gilligan is the president of the Petroleum Marketers Association and represents more than 8,000 retail and wholesale suppliers, from home heating oil companies to gas station owners.
"Approximately 60 to 70 percent of the oil contracts in the futures markets are now held by speculative entities. Not by companies that need oil, not by the airlines, not by the oil companies. But by investors that are looking to make money from their speculative positions," Gilligan explained.
Gilligan said these investors don't actually take delivery of the oil. "All they do is buy the paper, and hope that they can sell it for more than they paid for it. Before they have to take delivery."
"They're trying to make money on the market for oil?" Kroft asked.
"Absolutely," Gilligan replied. "On the volatility that exists in the market. They make it going up and down.""The volatility is being driven by the huge amounts of money and the huge amounts of leverage that is going in to these markets."
Asked who was buying this "paper oil," Michael Masters told Kroft, "… Lots of large institutional investors. And, by the way, other investors, hedge funds, Wall Street trading desks were following right behind them, putting money – sovereign wealth funds were putting money in the futures markets as well. So you had all these investors putting money in the futures markets. And that was driving the price up."
In a five year period, Masters said the amount of money institutional investors, hedge funds, and the big Wall Street banks had placed in the commodities markets went from $13 billion to $300 billion. Last year, 27 barrels of crude were being traded every day on the New York Mercantile Exchange for every one barrel of oil that was actually being consumed in the United States.
Yet when Congress began holding hearings last summer and asked Wall Street banker Lawrence Eagles of J.P. Morgan what role excessive speculation played in rising oil prices, the answer was little to none. "We believe that high energy prices are fundamentally a result of supply and demand," he said in his testimony.
As it turns out, not even J.P. Morgan's chief global investment officer agreed with him. The same that day Eagles testified, an e-mail went out to clients saying "an enormous amount of speculation" ran up the price" and "140 dollars in July was ridiculous."
If anyone had any doubts, they were dispelled a few days after that hearing when the price of oil jumped $25 in a single day. That day was Sept. 22.
Michael Greenberger, a former director of trading for the U.S. Commodity Futures Trading Commission, the federal agency that oversees oil futures, says there were no supply disruptions that could have justified such a big increase.
Everybody agrees supply-demand could not drive the price up $25, which was a record increase in the price of oil. The price of oil went from somewhere in the 60s to $147 in less than a year. And we were being told, on that run-up, 'It's supply-demand, supply-demand, supply-demand,'" Greenberger said.
A recent report out of MIT, analyzing world oil production and consumption, also concluded that the basic fundamentals of supply and demand could not have been responsible for last year's run-up in oil prices. And Michael Masters says the U.S. Department of Energy's own statistics show that if the markets had been working properly, the price of oil should have been going down, not up.
"From quarter four of '07 until the second quarter of '08 the EIA, the Energy Information Administration, said that supply went up, worldwide supply went up. And worldwide demand went down. So you have supply going up and demand going down, which generally means the price is going down," Masters told Kroft."So you had the largest price increase in history during a time when actual demand was going down and actual supply was going up during the same period. However, the only thing that makes sense that lifted the price was investor demand."
Masters believes the investor demand for commodities, and oil futures in particular, was created on Wall Street by hedge funds and the big Wall Street investment banks like Morgan Stanley, Goldman Sachs, Barclays, and J.P. Morgan, who made billions investing hundreds of billions of dollars of their clients’ money.
This would be the same Wall Street investment banks that the U.S. Treasury just bailed out to the tune of more than $350 billion and counting. You, the U.S. taxpayer, got screwed coming and going by Wall Street bankers and their allies in Congress and the Bush White House.
View the full report here:
So how was this investor speculation to drive up oil prices made possible?
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