The Price of Oil, Speculation and the Election
This opinion piece presents the opinions of the author.
It does not necessarily reflect the views of Rigzone.
If the oil market were functioning in an unfettered way, reflecting the true dynamics of supply and demand, there would be no reason for prices to be this high. To quote Sen. Bernie Sanders (D. Vt.) "The price of oil, while declining somewhat in recent weeks, was over $95 a barrel today. That's about $30 higher than two years ago. The theory behind the setting of oil prices is that its price is determined by the fundamentals of supply and demand. The fact of the matter is that there is more supply and less demand today than there was two years ago when gasoline prices averaged $2.44 a gallon" ('Stop oil Speculation Now' Huffington Post 6/15/11).
Perhaps even more succinctly and altogether applicable today were those words of truth uttered by the late Leon Hess, founder and Chairman of Hess Oil, and indisputably one of the Grandees of oildom, before the Senate Committee on Government affairs on Nov. 1, 1990 (I repeat, 1990): "I'm an old man, but I'd bet my life that if the Merc (the New York Mercantile Exchange) was not in operation there would be ample oil at reasonable prices all over the world."
The issue has only accelerated as highlighted in Senator Sanders commentary: "Ten years ago, speculators only controlled 30 percent of the oil futures market. Today Wall Street speculators control more than 80% of the market."
In effect oil is no longer priced, as it was in my trading days, on the basis of a "wet barrel." Those trading the market at the time were either the producers, or consumers or physical traders who took actual title to the oil and chartered vessels to deliver the oil to consumers around the world. Today oil is no longer priced as a wet barrel but rather as a financial instrument having little bearing on the underlying dynamics of supply and demand, being traded by myriad speculators most whom never have produced a barrel of oil, nor taken delivery, nor consumed a barrel of oil and in many cases have never seen a real oil well, or visited a refinery. Yet in large measure, their actions determine what we pay for a gallon of gasoline by buying and selling not "wet" barrels of oil, but financial instruments that well could be labeled "paper barrels."
In a report issued earlier this year by the St. Louis Federal Reserve Bank commenting "… unprecedented growth in commodity index trading coincided with a boom in commodity prices; some have extended that observation into a conclusion that speculation by financial traders- and not supply and demand- drove the recent boom in commodity prices. This kind of argument is perhaps strongest in oil market, where large investment banks. Hedge funds and other investment funds have invested billions of dollars in oil futures over the past decade." The study wisely admonishes "Disentangling the true drivers of oil prices is a critical first step for allocating resources and designing good policy."
April 2011, in a bright and hopeful moment responding to the pernicious influence of oil futures trading on oil prices, the Obama administration amid fanfare announced the formation of the "Oil/Gas Pricing Fraud Panel." It was meant to be a call to investigate whether oil prices were a true reflection of market forces or whether they had been impacted by speculation or worse, manipulation. Regretfully and perhaps better said, irresponsibly, now more than a year and a half after its formation, nothing, nada has been heard from this august body.
Couple this with the ongoing dereliction of Commodity Futures Trading Commission (CFTC) and the administration policies policing and countering the malign impact of oil commodity trading on the futures exchanges has been both irresponsible and non-existent.
Consider that on July 27, 2009 the Wall Street Journal published the article, "Traders Blamed For Oil Spike" reporting that "The Commodity Futures Trading Commission plans to issue a report next month suggesting that speculators played a significant role in driving wild price swings in oil prices- a reversal of an earlier CFTC position. Well, now three years later we are still waiting for the report.
But the CFTC's ineffectuality goes further. According to the Wall Street reform act, Dodd-Frank, required the CFTC to impose strict limits on the amount of energy futures that could be traded by speculators by January 17, 2012. We are now nearing the end of September and the CFTC still has not imposed any limits whatsoever, clearly in contravention to the stated law of the land. To quote Senator Sanders musings this June past: "Last month, six senators and I held a meeting in my office with Gary Gensler, Chairman of the CFTC. Unfortunately I was very disappointed in both the tone of the meeting and the complete lack of urgency at the CFTC with respect to cracking down on oil speculators as required by law."
The issue of speculation, and possible manipulation of oil prices, other than lip service, is clearly not being addressed by this administration. It is an issue that touches virtually every American consumer where it hurts most directly, in paying for his day-to-day needs of gasoline, heating oil and on. It needs be high on the agenda of national discourse as another four years of neglect on this issue could be disastrous!
Couple this with CFTC inaction it becomes a broad condemnation of the Administration's inattention to an issue that impacts the pocketbooks of virtually every American.
WHAT DO YOU THINK?
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Author, Oil & Finance: The Epic Corruption