Wall Streeters say speculators double gas prices
By Jerry Mazza
Online Journal Associate Editor
Jul 2, 2008
Gas could fall to $2 if Congress acts, analysts say, says Market Watch. In fact, the article's lead paragraph states, “The price of retail gasoline could fall by half, to around $2 a gallon, within 30 days of passage of a law to limit speculation in energy-futures markets, four energy analysts told Congress on Monday.” And you thought it was just a matter of over-consumption.
In a rare moment of candor, appearing before the House Energy and Commerce Committee, first Michael Masters of Masters Capital Management told members that the price of oil would quickly drop closer to its marginal of around $65 to $75 a barrel, like half the current $135-40. Ironically, this seems to jibe with my article, Ahmadinejad calls oil price hikes ‘manipulated,’ in which he said, “Speculation is the reason behind the increasingly high prices of crude, not a lack of supply.”
This is probably an historic event, having Wall Streeters and the Iranian president agree. Additionally, “Fadel Gheit of Oppenheimer & Co., Edward Krapels of Energy Security Analysis and Roger Diwan of PFS Energy Consultants agree with Masters’ assessment at a hearing on proposed legislation to limit speculation in futures markets.” Will meetings turn into action?
Krapels thought it would take less than 30 days to drive prices lower, since fund managers would quickly liquidate their stakes in futures markets. Gheit said, “Record oil prices are inflated by speculation and not justified by market fundamentals. Based on supply and demand fundamentals, crude-oil prices should not be above $60 per barrel.”
Rep. John Dingell, D-Mich., chairman of the full committee, said “Energy speculation has become a growth industry and it is time for the government to intervene. We need to consider a full range of options to counter this rapacious speculation.” These were his strongest words yet on the oil wolves. In fact, Market Watch mentions, he “introduced a bill on June 11 to get the Energy Department fact-gathering on energy prices, including the role played by speculators.”
How the scamming works
Masters pointed out that there are two kinds of futures market speculators. Traditional speculators need to hedge because they take physical possession of the commodities. But index speculators merely allocate a portion of their portfolio to commodity futures. Index speculation, according to Masters, damages price-discovery mechanisms provided by futures markets. Said simply: with index speculation you posses nothing but paper, so you play more easily.
The committee is looking for legislation to curtain index speculation, requiring higher-margin (money down) requirements; also requiring position limits for speculators and more disclosure of positions; lastly, preventing pension funds and investment banks from owning commodities. Why? It raises risks of loss of funds, either from pensions or bank assets.
By the way, both presidential candidates endorse closing the loopholes encouraging speculation in energy markets. But then I’m sure they endorse motherhood, apple pie, and the American flag. The question is how committed are they to really doing something about it?
You may remember the infamous Enron and “Enron Loophole.” Financial writer Pam Martens, in her article How a Shady Citigroup Subsidiary Secretly Makes Billions in the Oil Market, described the “Enron Loophole” this way: “What the Energy Group had long lobbied for and finally received from its Federal regulator was the breathtaking ability to trade oil contracts and oil derivatives secretly in the over-the-counter (OTC) market, thus avoiding the scrutiny of regulated commodity exchanges, their CFTC regulator, and Congress . . . The change in the law occurred via the Commodity Futures Modernization ACT (CFMA) and is called the Enron Loophole.” No scrutiny, no regulation, no honesty. That simple.
You may also remember that Enron, before bankrupting itself, bankrupted the State of California. It cornered energy sources then raised electricity prices sky-high, gouging California into bankruptcy and blaming financial failure on Governor Gray Davis. He was then subjected to a dubious recall vote that handed California to the “Terminator,” an apt title in this context, Arnold Schwarzenegger.
It was a new low that derived actually from George HW Bush’s support of legislation that allowed states to deregulate energy suppliers in the early '90s, not so different from the savings and loan debacle he inspired by deregulating standards for loans and savings bank investments. That doozey cost the U.S. some $300 billion underwriting bank failures.
Returning to “The Energy Group,” it is described by Martens this way: “Combing through government archives, the first noteworthy appearance of Phibro [a Citigroup subsidiary] occurs on April 6, 2001, when the Wall Street law firm of Sullivan & Cromwell sent a letter to the Commodity Futures Trading Commission (CFTC), the federal regulator of oil and other commodity trading, acknowledging that it was representing 'the Energy Group.'
“The letter was noteworthy because it delineated just who had teamed up to grease the oil rigging in Washington: namely, two investment banks (Goldman Sachs and Morgan Stanley); a house of cards that would later collapse (Enron); a proprietary trading firm inside a Frankenbank (Phibro inside Citigroup); and two real energy firms (BP Amoco and Koch Industries).” Takes your breath away, doesn’t it, if not a piece of your wallet.
Low-profile Phibro by the way is still in operation and has earned billions in trading of “crude oil, refined oil products, natural gas, and other commodities.” Citigroup (parent of Citibank) acquired Phibro in its merger with Traveler’s Group in 1998. And on and on it goes, how this shady subsidiary of Citigroup, Phibro, continues to make billions with its trading shenanigans for the financial “behemoth” Citigroup, the first bank with a trillion dollars in assets. Yet, it’s made at great cost to the American public.
It’s no surprise that sleepy-headed Congress is finally opening its eyes to speculation corruption, given the impact on food prices, as well as on heating, transportation, and manufacturing prices, to mention a few. Any layman can see how unbridled hikes in oil prices will suck his wallet, his savings, his assets, his way of life dry as a bone. It happened in California. It can happen to America.
Yet, as the Market Watch article reports, “Neal Ryan, manager at Ryan, Oil & Gas Partners, said that 'Speculation is the root of capitalism. If the speculation is forced out of the U.S. exchanges, it’ll simply show up on other exchanges that are OTC like the ICE, or new exchanges will pop up to allow for the spec trades to continue functioning.'”
If this kind of unregulated, secret speculation is allowed to continue in any exchange, new or old, you can kiss our economy goodbye. Unregulated speculation is not the root of our economy, it’s the bane of our economy, and will continue to poison it.
Yet Ryan went on to say that “he does see a reason for Congress to look at eliminating aspects such as allowing West Texas intermediate crude oil futures to trade on foreign markets and the ‘Enron loophole,' but ‘these exchanges are currently functioning as they are supposed to in a free marketplace.’” Again, free means “free to gouge money from the general public to enrich a number of ruthless individuals.” That’s not the same as a free country regulated by a set of laws that protects all of its citizens from predators.
Ryan hedged his way further on the issue of regulating speculation by saying, “The creation of a comprehensive U.S. energy policy that tackles issues of increasing domestic supply and reining in consumer demand via conservation should be Congress’ focus. 'Instead we’re on bended knee begging the Saudis to put more oil on the market and talking about shutting down spec trades.'”
Yes, a comprehensive U.S. energy policy, including developing alternate renewable sources of energy, is exactly what we need. But we don’t have one after eight years of Bush, and god knows how many years of the fixed-in-their-ways automakers and oilmen dictating, via their lobbyists, that Congress do nothing. Alternate energy sources could rein in consumer demand for oil without ruining the economy via price gouging.
Also, we are “on bended knee begging the Saudis to put more oil on the market,” since we became addicted to their inexpensive crude during WW II when FDR sewed up Saudi production to fuel our armies in our life or death struggle with the original Axis of Evil.
Unfortunately, in the post-war period alternative alternate energy sources were buried, killed, or granted marginal growth. It’s not that we lack the imagination to find alternative solutions. The oil thrombus caught in the body politic has blocked all other thinking and will, if not surgically removed, topple us, thanks, in part, to the Neil Ryans of the world and the speculators who work with them -- investment banks, hedge funds, private financial entities.
The bottom line
. . . is the lead paragraph from Martens’ article. “If you want to flush out market manipulations, don’t turn to the sleuths in Congress. They’ve been probing trading of the oil markets for two years and completely missed a company [Phibro] at the center of the action. During that period, a barrel of crude oil has risen from $50 to $140, leaving a wide swath of Americans facing a choice this coming winter of buying food or paying their heating bill.”
The speculators, including Citigroup and its Phibro subsidiary, could care less. But Martens points out a graver danger: “Today, the situation is as follows: Citigroup has taken $42 billion in credit losses and writedowns in the past year, just announced that more writedowns are coming, and the Fed has an intravenous money feeding tube hooked up between its vault and this banking/brokerage/subprime mortgage lending/oil trading mad scientist experiment.” The question is why is the American taxpayer keeping this trillion dollar Titanic afloat?
Lastly, Martens points out how Citigroup describes itself: “Currently our capabilities include trading and marketing derivatives/structured products in power, natural, crude and crude products.” She adds, “Enron also called itself the ‘premier’ energy trading organization. Apparently impressed with that model, Citigroup Energy has hired a significant number of former Enron traders.”
All I can say is watch your wallet, America. They’re coming for it, and your savings, pension, IRA, K-401, and house. The Citi Never Sleeps, as the ads say. And if we can’t turn to Congress for sleuthing, what financial revolution in this country can turn the speculative corruption around, that is, before it brings us another 1929?
Jerry Mazza is a freelance writer living in New York. Reach him at email@example.com.