ANALYSIS
Wall Streeters say speculators double gas prices
By Jerry Mazza
Online Journal Associate Editor
Jul 2, 2008, 11:21
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.
Bankrupting America
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 PROTECTED] net.
Copyright © 1998-2007 Online Journal
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