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My thanks to soccer_F1 for sending me this article. It's a report, compiled by Senators Coleman and Levin of the Permanent Subcommittee on Investigations (scary music please), entitled: "The Role of Market Speculation in Rising Oil and Gas Prices: A Need to Put the Cop Back on the Beat". This is no joke, these guys are part of Homeland Security, and the Republican's have made a huge mistake putting Coleman at the head of this committee. They thought they were getting a nice little yes-man from Minnesota because he uses words like "fella" in his campaign literature, but they must not have read his energy platform or realized he founded the Biofuel Caucus with (gasp) two Democrats.

Possibly the Republicans figured any guy interested in biofuels from an agricultural state must be looking to pump oil prices up to $100 so he can get his cut, but it turns out Coleman isn't from Minnesota at all - he's from (revealing music) Brooklyn! Now anyone from New York can tell you we have two parties here, the New York Democrats, whom America calls far-left radicals, and the No-So Democrats, who we nickname Republicans.

A New York Republican would be shot by Dick Cheney before they even got near the quails (because that man can smell a Democrat a mile away!), and I'm sure the VP is cursing up a storm after reading this report.

Coleman was actually a Democrat until 2002, and even chaired the great Paul Wellstone's 1996 campaign. For whatever reason he switched parties (also a tenuous thing in the Gov.-Jessie-Ventura-State), and because he is a firm right-to-lifer the Republicans just assumed, even though he was new, that he would become one of their mindless automatons who would toe the party line.

So the logic that people who are anti-abortion must also be in favor of screwing the American people, destroying the environment, and distributing automatic weapons at Wal-Mart may not be panning out here...

This is the same committee that freaked-out the party when they investigated FEMA's actions (or inactions) after Hurricane Katrina. Coleman said to "Brownie:"

"You didn't provide the leadership, even with structural infirmities... You're not prepared to kind-of put a mirror in front of your face and recognize your own inadequacies... The record reflects that you didn't get it or you didn't in writing or in some way make commands that would move people to do what has to be done until way after it should have been done."

But enough about Coleman; it's just important to understand how a Senate Majority Committee on Anything can criticize the oil industry, so you can understand how devastating this is for the Republicans (oops I mean Big Oil).

So the Report points to the Commodities Futures Modernization Act as a big culprit in driving up the price of oil in the past six years. The CFMA was one of the fastest acts of political payback ever enacted as it was forced into law as a rider on an 11,000 page appropriations bill that Clinton was forced to sign on December 21st, days before he left office.

Enron had contributed to 200 legislators' campaigns in 2000, and they all showed up on December 15th to revive this previously rejected legislation in a way that Clinton would not be able to veto it. Thus "Kenny Boy" and company were given free-rein to decimate the California economy, and they went so hog-wild that just 18 months later they had already caused a national crisis.

But Enron was just the tip of the iceberg. The deregulation of energy trading allowed oil companies and brokerage firms to establish massive commodities positions that dumped liquidity into the market and raised the price of oil from $20 to $70 over a 5-year period.

As we know from yesterday's article, that means that trading volume increased from $12T (that's $12,000,000,000,000) a-year to $40 trillion in that period. Same oil, more money. On the whole, $28 trillion dollars that could be put to work in other, more productive parts of the global economy (perhaps even paychecks) have been sucked up by Sen. Graham's pet bill.

I hope people have time to read this entire report but here are some key excerpts:

"The impact on market oversight has been substantial. NYMEX traders, for example, are required to keep records of all trades and report large trades to the CFTC. These Large Trader Reports, together with daily trading data providing price and volume information, are the CFTC's primary tools to gauge the extent of speculation in the markets and to detect, prevent, and prosecute price manipulation.

CFTC Chairman Reuben Jeffrey recently stated: "The Commission’s Large Trader information system is one of the cornerstones of our surveillance program and enables detection of concentrated and coordinated positions that might be used by one or more traders to attempt manipulation.”

In contrast to trades conducted on the NYMEX, traders on unregulated OTC electronic exchanges are not required to keep records or file Large Trader Reports with the CFTC, and these trades are exempt from routine CFTC oversight. In contrast to trades conducted on regulated futures exchanges, there is no limit on the number of contracts a speculator may hold on an unregulated OTC electronic exchange, no monitoring of trading by the exchange itself, and no reporting of the amount of outstanding contracts “open interest”) at the end of each day."

So the Enron-friendly regulations (and 5 years later, we still have no reform) allow big oil companies, brokers and hedge funds to manipulate the markets hidden from any regulators:

"Persons within the United States seeking to trade key U.S. energy commodities — U.S. crude oil, gasoline, and heating oil futures — now can avoid all U.S. market oversight or reporting requirements by routing their trades through the ICE Futures exchange in London instead of the NYMEX in New York."

"A trader may take a position on an unregulated electronic exchange or on a foreign exchange that is either in addition to or opposite from the positions the trader has taken on the NYMEX, and thereby avoid and distort the large trader reporting system.

Not only can the CFTC be misled by these trading practices, but these trading practices could render the CFTC weekly publication of energy market trading data, intended to be used by the public, as incomplete and misleading."

I know, it's nothing I haven't been saying for 2 years but now I have a senate committee backing me up!!!

"To the extent that energy prices are the result of market manipulation or excessive speculation, only a cop on the beat with both oversight and enforcement authority will be effective."

If the Democrats take the House this is a scandal that will make Enron look like someone cheated at rock, paper, scissors!

The people involved in this current scam watched the Enron crisis back in 2001 and said, "Gee, what a great idea!"

The CFTC defines a speculator as a person who, “does not produce or use the commodity, but risks his or her own capital trading futures in that commodity in hopes of making a profit on price changes."

"The large purchases of crude oil futures contracts by speculators have, in effect, created an additional demand for oil, driving up the price of oil for future delivery in the same manner that additional demand for contracts for the delivery of a physical barrel today drives up the price for oil on the spot market. As far as the market is concerned, the demand for a barrel of oil that results from the purchase of a futures contract by a speculator is just as real as the demand for a barrel that results from the purchase of a futures contract by a refiner or other user of petroleum."

"Although it is difficult to quantify the effect of speculation on prices, there is substantial evidence supporting the conclusion that the large amount of speculation in the current market has significantly increased prices; several analysts have estimated that speculative purchases of oil futures have added as much as $20-$25 per barrel to the current price of crude oil.

Additionally, by purchasing large numbers of futures contracts, and thereby pushing up futures prices to even higher levels than current prices, speculators have provided a financial incentive for oil companies to buy even more oil and place it in storage. A refiner will purchase extra oil today, even if it costs $70 per barrel, if the futures price is even higher.

As a result, over the past two years crude oil inventories have been steadily growing, resulting in U.S. crude oil inventories that are now higher than at any time in the previous eight years. The last time crude oil inventories were this high, in May 1998 – at about 347 million barrels – the price of crude oil was about $15 per barrel. By contrast, the price of crude oil today is about $70 per barrel. The large influx of speculative investment into oil futures has led to a situation where we have both high supplies of crude oil and high crude oil prices."

AH HA! It is no longer just me saying all this! This is a bubble that makes the housing market look rock solid by comparison!

On page 15 the report points out that, UNLIKE 2001 through 2003, when oil prices averaged less than $30 per gallon, supply currently exceeds demand. The last time supply exceeded demand was fall 1999 through spring 2001, when prices fell from $30 to $25 despite Enron manipulation. When the Enron scandal broke in mid 2001, oil fell from $30 to $15 before other manipulators stepped in and picked up the slack as 9/11 distracted us from pursuing the greatest corporate scandal in history.

I know there are conspiracy theorists who think that 9/11 was orchestrated by our own oil-backed government leaders working with the Saudis in order to force the people to go to war to distract them from the brewing scandal over Enron and to give the conservatives free reign to circumvent the constitution while allowing their backers to hold the American public hostage and force them to mortgage their homes in order to buy gas...

But I'm not one of those people. Who would believe that someone would allow 3,000 innocent people to die just so they could make a few Trillion dollars? That would be wrong...

According to the report "The U.S. Department of Energy’s Energy Information Administration [EIA] recently forecast that in the next few years global surplus production capacity will continue to grow to between 3 and 5 million barrels per day by 2010, thereby “substantially thickening the surplus capacity cushion.”

Gosh, that sounds like a lot of oil!

As we know, we have filled the SPR in the US, and Europe is about out of storage space as well with inventories now at a 20 year high:

So what is causing the high prices?

"As energy prices have not only increased but become more volatile, energy commodities have become an attractive investment for financial institutions, hedge funds, pension funds, commodity pools, and other large investors. One oil economist has calculated that over the past few years more than $60 billion has been spent on oil futures in the NYMEX market alone. This frenzy of speculative buying has created additional demand for oil futures, thereby pushing up the price of those futures. There also is evidence that the skyrocketing prices of metal commodities can partially be attributed to these skyrocketing oil prices."

The New York Times cited an estimate that there were, “at least 450 hedge funds with an estimated $60 billion in assets focused on energy and the environment, including 200 devoted exclusively to various energy strategies. Industry estimates suggest that approximately $100-$120 billion of new investment in the past three years has been in active and passive energy investment vehicles."

$120 Billion... Even at these inflated prices that's two Billion barrels of oil, 200 days worth of US imports!

"Over the past two years, the CFTC data shows more than a doubling in the “open interest” in both crude oil and natural gas contracts – essentially the number of outstanding futures contracts at the end of a trading day. The CFTC data indicates that much of the increase is due to “non-commercial” trading – namely, trading by speculators."

“There is little doubt that Katrina only exacerbated a troubling trend in energy prices that already seemed to ignore basic fundamental drivers to thrive instead on hype.”

“It’s all about futures speculators shooting for irrational price objectives, as well as trying to out-think other players – sort of like a twisted game of chess. The basic facts are clear, this market is purely and simply being controlled by over-speculation.”

Tim Evans, senior analyst at IFR Energy Services, stated, “What you have on the financial side is a bunch of money being thrown at the energy futures market. It’s just pulling in more and more cash. That’s the side of the market where we have runaway demand, not on the physical side.”

Some traders charge that certain hedge fund managers have purposefully contributed to a misperception that there is a shortage of supply. “There’s a few hedge fund managers out there who are masters at knowing how to exploit the peak theories [that the world is running out of oil] and hot buttons of supply and demand, (and) by making bold predictions of shocking price advancements to come (they) only add more fuel to the bullish fire in a sort of self-fulfilling prophecy.”

This is great, I hardly have to write anything! A very well written report, hopefully clear enough that even your average Congressman can understand it...

“At some point, this oversupplied market has to begin to break down — this house of cards which is dominated by speculative entities,” one futures trader noted, “and when those entities decide to start liquidating their futures positions in crude and gas, look out below.”

I love it when I'm quoted in government reports!

There is a sickening section on the profits made by brokerages and individual traders and you need to realize that every penny - the extra $20B in Exxon profits, the $60B made by brokerage houses and hedge funds (after paying the traders additional tens of billions), the hundreds of billions of dollars made by other oil companies, the hundreds of billions of dollars made by people (hopefully) like you who can afford to invest in these trades — all came out of the pockets of the American consumer!

Billions of these dollars go directly towards funding global terrorism (hence the initial concern of the Dept. of Homeland Security).

Oh yes, don't forget about the $1.3 trillion dollars a year that is being paid to the producers of oil every year that oil remains $40 above its historic average of $20. This money does virtually nothing for the economy outside of a few, very specialized companies like Haliburton, who's former CEO is just a heartbeat away from the Presidency.

The report comes to the obvious conclusion that regulations must be put back into effect. Should a Democratic Congress enact such legislation, the oil market will implode on a massive scale.

"The transactions and prices of commodities on such boards of trades are susceptible to excessive speculation and can be manipulated, controlled, cornered or squeezed to the detriment of the producer or the consumer and the persons handling commodities and the products and byproducts thereof in interstate commerce, rendering regulation imperative for the protection of such commerce and the national public interest therein."

"Commodity traders have no responsibility or obligation to look out for public rather than private interests. In some cases, it could be a breach of fiduciary duty for officers of a private corporation to look out for interests other than those of the corporation’s shareholders. Most recently, the Enron scandal, which involved misconduct by a number of traders at large energy and trading companies active in OTC trading, is clear evidence of how a few sophisticated, unscrupulous traders can harm not only other market participants, but also the public at large, by artificially increasing prices."

"For example, a trader wishing to disguise its position on the regulated market, or give the regulated market a false impression of its trading, could buy and sell an identical number of futures in different months; this would then be reported to the CFTC as a spread position. That same trader then could offset one of those positions, say, for example, the short position, on the unregulated exchange. In this example, the trader would have a net long position, but it would appear to the CFTC and the public, through the Commitment of Traders report, as a spread position. Hence, both the CFTC and the public would have an inaccurate view of the composition of the market. Only the trader would know the correct position. It is not difficult to imagine other schemes to distort the CFTC’s market data."

“Growth in our industry is certainly exceeding the ability of the regulators to get their heads around it.”
–Jeffrey Sprecher, ICE Chairman and CEO

Passage of legislation to rein-in this madness will hurt brokerages, the oil sector, ICE, CME, CBOT, etc. And panic will ensue if it begins to look like Gore or Clinton (or several other Democrats) may get a nomination, as the same stroke of the pen that sold America down the river can also take it back!

Source: Oil Price - The Need to Put the Cop Back on the Beat