It's not enough that speculators and hedge funds have wreaked havoc in the economic system first with the internet bubble of 2000, then with housing bubble (still bursting), but now they've turned their attention to oil and food and are currently in the process of running up prices and creating bubbles in those arenas. It represents the Enronification of food and oil in much the same way that Enron caused huge increases in electricity prices for Californians and others a few years ago by manipulating the market. By the way this isn't what caused the collapse of Enron - charging Grandmas in California outrageous prices for their utility bills. That was all perfectly legal. It was their accounting practices that brought them down. Now oil speculators are manipulating an unregulated futures market causing huge increases in the cost of vital products like food and oil. But this time they've found the perfect vehicle for making a killing in more ways than one. The demands for food and oil are only going to increase so they can bid up the prices for those commodities endlessly. The only way they can lose is if demand were actually to decrease. Then prices might come down, and they would be sitting with overpriced futures contracts. But this is unlikely to happen any time soon. The likliest scenario is that, thanks to them, oil and food prices are likely to continue to rise in a virtually unending upward spiral causing widespread food riots worldwide and pain at the pump here at home which will pauperize the middle class.
Thanks to the deregulation of the commodities markets in 2000, no one knows the mechanics of how these financial instruments are traded or in what quantities or by whom. Some have said that perhaps 60% of today's oil prices are due to pure speculation. It's not a function of supply and demand because the world's oil producers are pumping their hearts out although they can control supply if they want to. The fact that there is abundant supply points to speculation as the factor that's driving up gas prices.
The price of crude oil today is not made according to any traditional relation of supply to demand. It’s controlled by an elaborate financial market system as well as by the four major Anglo-American oil companies. As much as 60 percent of today’s crude oil price is pure speculation driven by large trader banks and hedge funds. It has nothing to do with the convenient myths of Peak Oil. It has to do with control of oil and its price. How?
First, the crucial role of the international oil exchanges in London and New York is crucial to the game. NYMEX in New York and the ICE Futures in London today control global benchmark oil prices which, in turn, set most of the freely traded oil cargo. They do so via oil futures contracts on two grades of crude oil: West Texas Intermediate and North Sea Brent.
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All this is well and official. But how today’s oil prices are really determined is done by a process so opaque only a handful of major oil trading banks such as Goldman Sachs or Morgan Stanley have any idea who is buying and who selling oil futures or derivative contracts that set physical oil prices in this strange new world of “paper oil.”
With the development of unregulated international derivatives trading in oil futures over the past decade or more, the way has opened for the present speculative bubble in oil prices.
Since the advent of oil futures trading and the two major London and New York oil futures contracts, control of oil prices has left OPEC and gone to Wall Street. It is a classic case of the “tail that wags the dog.”
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.”
What the Senate committee staff documented in the report was a gaping loophole in US government regulation of oil derivatives trading so huge a herd of elephants could walk through it. That seems precisely what they have been doing in ramping oil prices through the roof in recent months.
The Senate report was ignored in the media and in the Congress.
The report pointed out that the Commodity Futures Trading Trading Commission, a financial futures regulator, 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?
They seem to have deliberately walked away from their mandated oversight responsibilities in the world’s most important traded commodity, oil.
Enron has the last laugh . . .
As that US Senate report noted, “Until recently, US energy futures were traded exclusively on regulated exchanges within the United States, like the NYMEX, which are subject to extensive oversight by the CFTC, including ongoing monitoring to detect and prevent price manipulation or fraud. In recent years, however, there has been a tremendous growth in the trading of contracts that look and are structured just like futures contracts, but which are traded on unregulated OTC electronic markets. Because of their similarity to futures contracts they are often called 'futures look-alikes.'
"The only practical difference between futures look-alike contracts and futures contracts is that the look-alikes are traded in unregulated markets whereas futures are traded on regulated exchanges. The trading of energy commodities by large firms on OTC electronic exchanges was exempted from CFTC oversight by a provision inserted at the behest of Enron and other large energy traders into the Commodity Futures Modernization Act of 2000 in the waning hours of the 106th Congress.
Now it is indeed ironic if not demonic that Wall Street can interject itself in the commodities markets, make millions for hedge funds and speculators while causing widespread pain and starvation in the rest of the world. And it's all perfectly legal! It's Enron's dream become reality. Wall Street produces nothing, sells nothing but paper, but yet can enrich itself at the expense of poor people the world over. By driving up prices on vital necessities, it provides a disservice to humanity while enriching itself. Capitalism has indeed run amok.
