It’s Speculation and it’s Probably Criminal!

Implications: The traditional rules of Supply and Demand no longer apply. Sixty percent (60%) of the price of oil is being driven by speculation, controlled by an elaborate financial system and four major oil companies that are being motivated by tens of billions of dollars from major hedge funds under the control of Goldman Sachs, Morgan Stanley, Citigroup, JP Morgan Chase and others.

Analysis:  In an earlier post titled, “A Release from the Strategic Petroleum Reserve Will Not Fundamentally Impact the Price of Oil” I applauded Mr. Graves and the American Trucking Association (ATA) for their efforts, but explained that a release from the Strategic Petroleum Reserve (SPR) would not impact the price of Oil. Since then, the ATA and members of the trucking community have “continued to shout at the rain”, just this time in front of Congress.  

It’s not even the Organizational of Petroleum Countries (OPEC). It is the New York Mercantile Exchange (Nymex) in New York, the Intercontinental Exchange (ICE) in London and to a lesser degree, the Dubai Mercantile Exchange (DME) trading Dubai crude. All of these exchanges are primarily managed by US and British citizens and they control today’s price of oil by trading oil futures through the use of unregulated international derivatives on two grades of crude oil; West Texas Intermediate and North Sea Brent.  

As cited in the source article, 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.” The Commodity Futures Trading Commission (CFTC) which is empowered by CEA to establish such trading limits "as the commission finds are necessary to diminish, eliminate, or prevent such burden".  

But instead of limiting damage done by uncontrolled speculation, CFTC in January of 2006 allowed US Traders to begin using ICE Futures trading terminals in London to begin trading under the cloak of darkness. The source article points out that ICE Futures in London is owned by a US company based in Atlanta, GA. And that the former chairman of CFTC, James Newsome is the current chief executive officer of NYMEX and sits on the board of the Dubai Exchange.  

Unlike the author of the source article, I have no idea whether the revolving doors of public to private jobs has created a conflict of interest, but I am concerned the records of daily trading data that contain price and volume information are no longer receiving the degree of “sunshine” required for us to know. Now being traded Over the Counter (OTC) in the form of “future look – alikes”, the billions and billions of dollars that are betting short on the US Dollar and long on oil are artificially inflating the price of oil while doubling reserves. (Chart in source article dramatically illustrates the impact)

Remember:  The market can not tell the difference between an oil contract by a speculator or a contract from a refinery.  

These issues, along with the need to increase margin size are things that ATA and others should be yelling about. Yes, there are concerns about peak oil and geopolitical unrest, but current speculation issues are at the core of the problem and should be against ones “better angels”.  

Business must remain the “great equalizer” in the world and they can no longer compete when sums of money that are larger than the Gross Domestic Product (GDP) of most countries are in play. It’s simply not fair, and that is what Congress should be listening too!