Since around October last
year, the price of crude oil on world futures markets has exploded.
Different people have different explanations. The most common one is
the belief in financial markets that a war between either Israel and
Iran or the USA and Iran or all three is imminent. Another camp argues
that the price is rising unavoidably because the world has passed what
they call “Peak Oil”—the point on an imaginary Gaussian Bell Curve at
which half of all world known oil reserves have been depleted and the
remaining oil will decline in quantity at an accelerating pace with
Both the war danger and peak oil explanations are off base. As in the
astronomic price run-up in the Summer of 2008 when oil in futures markets
briefly hit $147 a barrel, oil today is rising because of the speculative
pressure on oil futures markets from hedge funds and major banks such
as Citigroup, JP Morgan Chase and most notably, Goldman Sachs, the bank
always present when there are big bucks to be won for little effort
betting on a sure thing. They’re getting a generous assist from
the US Government agency entrusted with regulating financial derivatives,
the Commodity Futures Trading Corporation (CFTC).
Since the beginning of October 2011, some six months ago, the price
of Brent Crude Oil Futures on the ICE Futures exchange has risen from
just below $100 a barrel to over $126 per barrel, a rise of more than
25%. Back in 2009 oil was $30.
Yet demand for crude oil worldwide is not rising, but rather is
declining in the same period. The International Energy Agency
(IEA) reports that the world oil supply rose by 1.3 million barrels
a day in the last three months of 2011 while world demand increased
by just over half that during that same time period.Gasoline usage is
down in the US by 8%, Europe by 22% and even in China. Recession across
much of the European Union, a deepening recession/depression in the
United States and slowdown in Japan have reduced global oil demand while
new discoveries are coming online daily and countries like Iraq are
increasing supply after years of war. A brief spike in China’s oil purchases
in January and February had to do with a decision last December to build
their Strategic Petroleum Reserve and is expected to return to more
normal import levels by the end of this month.
Why then the huge spike in oil prices?
Playing With 'Paper Oil'
A brief look at how today’s “paper oil” markets function is useful.
Since Goldman Sachs bought J. Aron & Co., a savvy commodities trader
in the 1980’s, trading in crude oil has gone from a domain of buyers
and sellers of spot or physical oil to a market where unregulated speculation
in oil futures, bets on a price of a given crude on a specific future
date, usually in 30 or 60 or 90 days, and not actual supply-demand of
physical oil determine daily oil prices.
In recent years, a Wall Street-friendly (and Wall Street financed) US
Congress has passed several laws to help the banks that were interested
in trading oil futures, among them one that allowed the bankrupt Enron
to get away with a financial ponzi scheme worth billions in 2001 before
it went bankrupt.
The Commodity Futures Modernization Act of 2000 (CFMA) was drafted by
the man who today is President Obama’s Treasury Secretary, Tim Geithner.
The CFMA in effect gave over-the-counter (between financial institutions)
derivatives trading in energy futures free reign, absent any US Government
supervision, as a result of the financially influential lobbying pressure
of the Wall Street banks. Oil and other energy products were exempt
under what came to be called the “Enron Loophole.”
In 2008 during a popular outrage against Wall Street banks for causing
the financial crisis, Congress finally passed a law over the veto of
President George Bush to “close the Enron Loophole.” And as of January
2011, under the Dodd-Frank Wall Street Reform act, the CFTC was given
authority to impose position caps on oil traders beginning in January
Curiously, these limits have not yet been implemented by the CFTC. In
a recent interview Senator Bernie Sanders of Vermont stated that
the CFTC doesn't "have the will" to enact these limits and "needs to
obey the law.” He adds, "What we need to do is…limit the amount of oil
any one company can control on the oil futures market. The function
of these speculators is not to use oil but to make profits from speculation,
drive prices up and sell." While he has made noises of trying to close
the loopholes, CFTC Chairman Gary Gensler has yet to do so. Notably,Gensler
is a former executive of, you guessed, Goldman Sachs. The enforcement
by the CFTC remains non-existent.
The role of key banks along with oil majors such as BP in manipulating
a new oil price bubble since last Autumn, one detached from the physical
reality of supply-demand calculations of real oil barrels, is being
noted by a number of sources.
A ‘Gambling Casino…’
Current estimates are that speculators, that is futures traders such
as banks and hedge funds who have no intent of taking physical delivery
but only of turning a paper profit, today control some 80 percent of
the energy futures market, up from 30 percent a decade ago. CFTC
Chair Gary Gensler, perhaps to maintain a patina of credibility while
his agency ignored the legal mandate of Congress, declared last
year in reference to oil markets that "huge inflows of speculative money
create a self-fulfilling prophecy that drives up commodity prices."
In early March, Kuwaiti Oil Minister Minister Hani Hussein said in an
interview broadcast on state television, "Under the supply and demand
theory, oil prices today are not justified."
Michael Greenberger, professor at the University of Maryland School
of Law and a former CFTC regulator who has tried to draw public attention
to the consequences of the US Government’s decisions to allow unbridled
speculation and manipulation of energy prices by big banks and funds,
recently noted, "There are 50 studies showing that speculation adds
an incredible premium to the price of oil, but somehow that hasn't seeped
into the conventional wisdom," Greenberger said. "Once you have the
market dominated by speculators, what you really have is a gambling
The result of a permissive US Government regulation of oil markets has
created the ideal conditions whereby a handful of strategic banks and
financial institutions, interestingly the same ones dominating world
trade in oil derivatives and the same ones who own the shares of the
major oil trading exchange in London, ICE Futures, are able to manipulate
huge short-term swings in the price we pay for oil or gasoline or countless
other petroleum-based products.
We are in the midst of one of those swings now, one made worse by the
Israeli saber-rattling rhetoric over Iran’s nuclear program. Let me
go on record stating categorically my firm conviction that Israel will
not engage in a direct war against Iran nor will Washington. But the
effect of the war rhetoric is to create the ideal backdrop for a massive
speculative spike in oil. Some analysts speak of oil at $150 by summer.
Hillary Clinton just insured that the oil price will continue to ride
high for months on fears of a war with Iran by delivering a new ultimatum
to Iran on the nuclear issue in talks with Russian Foreign Minister
Lavrov, “by year’s end or else…”
Curiously, one of the real drivers of the current oil price bubble is
the Obama Administration’s economic sanctions recently imposed on oil
transactions of the Central Bank of Iran. By pressuring Japan, South
Korea and the EU not to import Iranian oil or face punitive actions,
Washington has reportedly forced a huge drop in oil supply from Iran
to the world market in recent weeks, giving a turbo boost to the Wall
Street derivatives play on oil. In a recent OpEd in the London Financial
Times, Ian Bremmer and David Gordon of the Eurasia Group wrote, “… removing
too much Iranian oil from the world's energy supply could cause an oil
price spike that would halt the recovery even as it does some
financial damage to Iran. For perhaps the first time, sanctions have
the potential to be ‘too successful,' hurting the sanctioners as much
as the sanctioned.”
Iran is shipping 300,000 to 400,000 a barrels a day less than its usual
2.5 million barrels a day, according to Bloomberg. Last week, the US
Energy Information Administration said in a report that much of that
Iranian oil isn't being exported because insurers won't issue policies
for the shipments.
The issue of unbridled and unregulated oil derivatives speculation by
a handful of big banks is not a new issue. A June 2006 US Senate Permanent
Subcommittee on Investigations report on “The Role of Market Speculation
in rising oil and gas prices,” noted, “…there is substantial evidence
supporting the conclusion that the large amount of speculation in the
current market has significantly increased prices.”
The report pointed out that the Commodity Futures Trading Trading Commission
had been mandated by Congress to ensure that prices on the futures market
reflect the laws of supply and demand rather than manipulative practices
or excessive speculation. The US Commodity Exchange Act (CEA) states,
“Excessive speculation in any commodity under contracts of sale of such
commodity for future delivery . . . causing sudden or unreasonable fluctuations
or unwarranted changes in the price of such commodity, is an undue and
unnecessary burden on interstate commerce in such commodity.” Further,
the CEA directs the CFTC to establish such trading limits “as the Commission
finds are necessary to diminish, eliminate, or prevent such burden.”
Where is the CFTC now that we need such limits? As Senator Sanders correctly
noted, the CFTC appears to ignore the law to the benefit of Goldman
Sachs and Wall Street friends who dominate the trade in oil futures.
The moment that it becomes clear that the Obama Administration has acted
to prevent any war with Iran by opening various diplomatic back-channels
and that Netanyahu is merely trying to use the war threats to enhance
his tactical position to horse trade with an Obama Administration he
despises, the price of oil is poised to drop like a stone within days.
Until then, the key oil derivatives insiders are laughing all the way
to the bank. The effect of the soaring oil prices on fragile world economic
growth, especially in countries like China is very negative as well.
Morgan Korn, Oil Speculators Must Be Stopped and the CFTC “Needs to
Obey the Law”: Sen. Bernie Sanders, Daily Ticker, March 7, 2012, accessed
UpstreamOnline, Kuwait's oil minister believes current world oil
prices are not justified, adding that the Gulf state's current production
rate will not affect its level of strategic reserves, 12 March 2012,
accessed in http://www.upstreamonline.com/live/article1236944.ece
Peter S. Goodman, Behind Gas Price Increases, Obama's Failure
To Crack Down On Speculators, The Huffington Post, March 15, 2012,
accessed in http://www.huffingtonpost.com/peter-s-goodman/gas-price-increase_b_1346035.html
Tom Parfitt, US 'tells Russia to warn Iran of last chance'
, The Telegraph, 14 March 2012, accessed in http://www.telegraph.co.uk/news/worldnews/middleeast/iran/9142688/US-tells-Russia-to-warn-Iran-of-last-chance.html
Steve Levine, Obama administration brushes off oil price impact
of Iran sanctions, Foreign Policy, March 8, 2012, accessed in
F. William Engdahl, ‘Perhaps 60% of today’s oil price is pure
speculation’, Global Research, May 2, 2008, accessed in http://www.globalresearch.ca/index.php?context=va&aid=8878.