On Oil and Its Manipulation

I have been following the Enron Loophole discussions and had a conversation with Sen. Feinstein’s office last week. I was looking for answers to the very confusing timeline of a bill that initially looked as if it was not passing, but was later attached to the Farming Bill that was passed after veto attempts. See more details here.

I believe my confusion lies with the fact that the “ENRON LOOPHOLE” is part of CFTC Reauthorization Act of 2008, which is a title attached to the Farm Bill that was recently passed. There seems to be a good deal of confusion here as the Farm Bill was initially Vetoed and then overridden. THEN it was found that 35 pages were “missing” from the original bill that was already passed. Both the House and the Senate eventually passed it with with enough votes to override veto. It is now law.

To be honest,  I am not sure I have seen such a level of obfuscation with any bill before, but that is just me I suppose.

Much of my focus of late has been the concerning fact surrounding manipulation and limited oversight of commodity future’s market…O I L !

In my research, it appears that The Enron Loophole was opened in what seems to be a less than honorable manner by Phil Graham when it pushed in as a last minute attachment to a bill as the Senate was trying to finish up for Christmas break. This is what has been blamed for helping to push oil prices up beyond the simple price/demand levels. In addition, since the loophole was opened, the Intercontinental Commodity Exchange [ICE] has been trading oil futures without U.S regulatory oversight. This is precisely what the  CFTC Reauthorization Act was designed to fix.

Just as I thought the bill’s passage has been able to close the door on excessive leverage and other manipulations of the oil futures market, I find out that it somehow does nothing of the sort. The loophole is closed, but only for the natural gas markets! HUH? How did that happen?

Well, there is now good news for those that believe that oil prices have moved well beyond any normal pattern. The House of Representatives has approved a bill on Thursday, June 26, that would provide for the Commodity Futures Trading Commission [CTFC] to enact emergency measures to “maintain or restore orderly trading.”

There have previously only been four times that the CTFC has been able to utilize these broad powers and in their own words:

The Commission has exercised its emergency powers in response to extreme events, such as manipulation or a specific disturbance that caused a sudden shock to the markets. The CFTC has never exercised emergency powers based on price trends that have developed over months or years.

Go get ‘em!

Note: Make sure to listen to The Disciplined Episode Podcast # 63 as we have Professor Michael Greenberger, former CTFC Director of the Division of Trading and Market to discuss his fight against the Enron Loophole and the speculative manipulation within the oil future markets.

Comments

[Dan S1]

If I can't speculate in the energy markets, then to be fair, no one should be able to speculate in the equity markets or at the casinos.

[PrudentMan, CFA]

Our largest petroleum company is eleventh in size of all petroleum companies in the world. They all are not publicly owned. To infer, without any evidence whatsoever, that the price is being manipulated is disingenuous as well as the claim by some socialistic congressmen that their are oil leases with oil not being drilled. Congress' economic ignorance is so apparent it is frightening as well as the fact that we only have the practical choice of picking from two sitting senators to become our president.



Whether oil price is manipulated or not is known when the future contract expires and the user pay the producers. That is what, though many don't get it, the free market. To be surprised that legislators support legislation that favors their contributors and electorate is naive. It has been going on for centuries. Congressional term limits would ameliorate its impact as well as the line item veto and a balanced budget amendment.

If you depend upon undependable sources for you raw materials there will be a risk premium, e.g., petroleum.

[Noudaman]

All speculation aside, the real culprit in our current oil supply chain fiasco is the myth of America's dependence on Middle East petroleum. Only about 40 percent of that oil comes from the United States. The rest of it is called "foreign" oil. But where does the oil really come from? Most people think most of the oil comes from the Middle East.

But this is perhaps one of the great fuel fallacies. In fact, the two single largest foreign oil suppliers for the United States are its two closest neighbors, Canada and Mexico. Oil from those countries makes up about 35 percent of the supply.

After that is Venezuela and Saudi Arabia. The United States actually gets just as much oil from Africa as from the Middle East. In Minnesota, 80 percent of our oil comes from Canada.

All broken down, America receives just 12% of its daily import from the Middle East! To support the notion that unreast in that region is the logic behind our spiraling fuel costs is truly the crime of the millenium.

[Peter Sterling]

Its idiotic to try and legislate the oil price down. Stop buying oil from overseas first. Develop our own reserves.

By imposing bans on leasing, and encouraging environmentalists to challenge seismic and drilling permits on existing leases, politicians ensure that we will never increase our proven reserves. In fact, reserves will decrease, as we deplete existing deposits and don’t replace them. The rhetoric is clever – but disingenuous, fraudulent and harmful.

Continued US drilling restrictions will further exacerbate the global demand-supply imbalance, and send “futures” prices even higher.

Short-sighted and ill-informed Environmental groups have hijacked and destroyed the American economy over the last 30 years by closing off America’s energy supplies.

America is the only country in the world to close off its offshore oil and gas-fields to development.

Its simple to get new American energy supplies quickly, Appeal to Corporate Greed: If oil companies are given enough financial incentives, they will move much faster than anyone believes and could find and start producing new oil and gas within 2-3 years, then ramp quickly up to produce enough energy to completely replace oil imports within 10-12 years.

See; www.strategicnine.com/...

[TA]

@Dan - unlike equities, commodity speculation costs everyone(including those who want nothing to do with the market) money and has a very negative impact on the economy.

No it's not the same thing.

[RWB]

Noudamon wrote: "All broken down, America receives just 12% of its daily import from the Middle East! To support the notion that unreast in that region is the logic behind our spiraling fuel costs is truly the crime of the millenium. "

America's consumption of oil is not what sets its price. It is a global commodity, and global consumption sets the price. It doesn't matter if we don't get much of our oil from the Middle East--trouble in the Middle East is likely to push futures prices higher worldwide. (And it should be noted that Africa has its own problems with oil that pushes both spot and futures up).

Peter Sterling wrote: "Its idiotic to try and legislate the oil price down. Stop buying oil from overseas first. Develop our own reserves."

Producers will always produce the cheapest oil first. Then they'll produce more expensive oil as long as they can make a profit at the current world price. Right now, there is almost no oil that is basically too expensive to get. But considering the time and capital expenses of developing new fields, and the historical volatility of oil prices, oil producers may be reluctant to dive headlong into more expensive forms of oil (oil sands, oil shales, etc.). So it's not a simple case of "develop our own reserves" solving all our problems. Even if we were to become a net exporter of oil, the oil we consume ourselves would still be priced by the world market.

[mstang]

As mentioned above, corporate greed and political persuasion has continued in leaving the common citizen with little opportunity but to put up with excessive price increases. It appears that all we have left to do is continue to complain about it until enough time has passed and a political election requires a candidate to win the popular vote by making open-ended promises. Maybe a Senate oversight committee should be put together by some senators without the unfortunate energy industry influence, if those exist at all.

[hippypaul]

How about two radical proposals
1. Remove the technique of passing a bill by inclusion
2. Repeal the entire Commodity Futures modernization Act of 2000 and return to the regulations which were put in pace after the depression and which have protected us for around seventy years.

[GH]

Andrew,

GREAT job with this article! Please stay on this topic and keep digging and keep posting. Make sure you see all the Senate Commerce Committee hearings from June; the video is at the cspan web site.

Some things you can dig into:
- Intentional conflation by Big Oil sycophants of the terms "speculation"... and "manipulation&quo... to mislead listeners about what's being stated and discussed by experts
- Republican use of filibusters to prevent debate (on CFTC-related legislation) which would clarify the manipulation issue and expose the current crop of Phil Gramm wannabes
- Conflation of sweet crude (for which demand is outstripping supply) with sour crude (of which supply is abundant) by Saudi Arabians and Libyans, to hide their inability to increase supply of sweet crude
- Ignorant conflation of sweet vs. sour crude by mainstream media (including online sources like MarketWatch), exacerbating misunderstandings of Saudi and Libyan statements
- Israeli cabinet members helping Goldman-Sachs and Morgan Stanley further drive up WTI oil futures by hyping mideast tensions, thereby manipulating more retail investors and fund managers into buying more USO, XLE, etc.

[john s. gordon]

phil gramm is one of many culprits, they are all acting in concert to screw the consumers.
> jack

[Dan S1]

blah-blah: I respectfully disagree with you. There could be speculation on the short side for the early 90's and it caused commodity prices to fall significantly, so there it had a positive effect on the economy. Was it a problem then?

Also, speculation does not cost everyone. For me to buy a contract, someone else has to sell me a contract at the same price. If I lose, the other side of my trade wins. So there is a winner and loser (excluding commissions and fees).

You just don't want to have the other side where commodity prices rise significantly.

I have the same right as you do to speculate in any market I wish.

[Shaggieman]

Speculation with basic necessities such as food, water and yes gasoline should never be allowed. The greedy few are making life unbareable for the majority and this should NOT be allowed.

[Ronmac]

All of you guys griping about the speculators should read Dan S1's reply...the specultors make and lose money on each other. At the end of each month they all settle up.
There is not true effect on the price...it's all about population, demand, and hoarding through countries not allowing drilling (including the US)...so get over trying to find the boogie man. The boogie man is us.

[scfranklin94]

Shaggieman- just how should prices be determined? Should the government set the price for crude? What if the Feds said they'll only pay $75 barrel, and then none of the foreign producers decided to sell to us? You can argue that they have sell to us to meet their budgets, but always remember it's much easier to close a valve on an oil well than to drill it in the first place. The captive US producers will only meet 50% of our daily usage. One could argue that the Canadian crude is captive also, but they are building a pipeline for export to China via Vancouver - telling them to meet our price or else would only speed up the construction and capacity of that pipe. Most of the new wells cost a minimum of $70 to drill, at that rate few will drill unless they think the price will stay above $100 for a long time.

[Dr. No]

ronmac/dan: you small potatoes trader settle at the end of the month. if you would be a big potatoes trader you would roll over your deal at the end of the month because there is a bigger idot to buy. which is the reason why there is ten times the volume traded than delivered.

dan: all that is being asked is that you trade/speculate the same way AS IN equities, ie put up 50% margin and not 5-7%. Or even better gamble as in the casino, where the bank ALWAYS wins and you have to put up 100% of your chip value and not just 5-7%.

[nakedjaybird]

Shaggieman - you are correct.

There is a BIG difference between speculating (gambling, betting) with discretionary funds at the casino, racetrack, athletic events or even the stock market [which margins @ 100% discourage, as does mandatory delivery and also no other permitted leverage in say energy wheeling and also housing) vis-a-vis speculating on basic needs which cause non-betters or non-players severe pain.

As to some of the other comments - what's idiotic is to continue to have government fund and support drilling and mining energy production while ignoring free, abundant, readily available and forever souces such as solar and wind (and tidal, geothermal, bio, etc.). The alternatives are what are going to drive the price of oil/gas down. And if they don't, it won't matter because we won't be using them. To guarantee that, find non-oil and non-gas alternatives for what we currently use (and on a btu basis we will use a lot less, because 70% of the oil and gas we consume is lost as waste heat!!!! Go figure, folks.

[JennH1310]

Thank you Dr.No for putting some folks in their place.... Contracts are being rolled over and oil is being bought at 5% and 7% margin accounts.. Why is their more contracts/paper than the actual commodity itself ???? Why are traders allowed to "Role Over" their contracts???? Why does the NYNEX set the price for OIL for the entire country when only 3% of the oil supply is traded on the NYNEX???? Speculation may not be the SOLE FACTOR in the oil crisis, however, it is a CONTRIBUTING FACTOR to the problem and our goverment has the means to so something about it and doesnt... Any relief at these prices can help families and small business... Shameless... :(

[[e-mail]]

You can say what you want traders,but when @#it hits the fan,you will be rolling over on each other to save your greedy as@s,so fast the law firms will need extra help to process all of you, you have been outed by your own buddies on tape,so think about those emails & text messages you sent to Canada,& back to the USA,hey I need to use,borrow,rent some shares,Ok,Yea!Laugh,, naked short selling shares out of thin air", are bringing big,fast money,(Ref:jsmineset.c... CRIME OF THE CENTURY) & 7/1/2008 )Ref:David Brooks,Total Control of USA in Sight for Goldman Sachs)nytimes.com .
Congress has no power,if it did,those C-Span shows for the sake of show, only proved one thing, the CFTC is a useless bunch,they did out the likes of Goldmans,JP Morgan Chase & there buddies accross the pond while trying to answer a question, a slip up,& out it came! At least we know the 24yr olds that went wild createing,new ways to rake in billions,were left un-supervised by higher management ,led to huge losses to I-banks world wide,knowing all of this, It looks as Goldmans sold SIV's as good paper!!Now,here is why we need to look at the time frame that ETF's where put into play?!Also,the COT reports,that support some thing is not right?It seems the MSM,Congress,the Fed with the I-Banks all try to blame any & every thing except,for what it is! Oil will rise higher,what those Harvard & Berkly Socialist schools turned out managers of monetary markets, that help caused a mass melt-down,effecting world wide markets! Look at Cap & Trade in the Asia markets,it has already produce massive amouts of scams thru-out the region! If you look to the Corps who are rakeing in trillions,from imposeing higher taxes thru so-called inviormental friendly programs,are now trying to do the same here! Who stands to make the most from higher oil,& gas prices? Any corp that plans to put pressure on congress & have Tax funds funneled there way! All these enviormental groups have shares in Corps that it benifits to keep fuel prices high,then they can push green as a fix,yet look at how corn worked! The steps to get oil & fuel prices down,crack down on the Feds being run by Goldmans now,bring back a truely free market trade system not controled by a few! Alow American oil Co's to drill where States want them ASAP!Use coal, we have clean coal already in use,expand on its model! Geothermal should have been on lone 25 yrs ago,but the 1965 green freaks took power, Now take that Power away, for Good!! To know what will work as renewable energy,make damn sure a long study is conducted & verified, without tax payers funds, if any are used, that product would be owned by Americans, instead of I-Banks whom are only for them self! The ideal of term limits, is the best one, but do you think Congress will let that happen? Last,does any one know how to get the names of a Companys Share holders Names? If so,please post it, It will give us all a trail to a bunch of folks that need to come clean!! Like I said,Traders are flipping fast & furious, to keep thier butts from getting longer jail time!!

[paulk8756]

Get ready everybody. The only way we're going to resolve this is at the BALLOT BOX.

[jjason]

Thank you for the article. I hope that my congressman, senators and Barack Obama do something soon.

Phil Gramm and his wife should be investigated and charged with corruption or for being traitors... and those I banks and the law firm too.