Today continuing with oil and speculation, Greenberger and Guilford. Brought to as usual by Demand Side the book, see DemandSideBooks.com. Look for the final first edition on May 15. Today is mostly a relay, continuing from the hearing of the Democratic Steering and Policy Committee, here with Gene Guilford.
A Couple of notes. First on the Enron loophole, which is mentioned at the outset. The Enron Loophole was the exemption from government regulation for most over-the-counter energy trades and trading on electronic markets. It was enacted in the Commodity Futures Modernization Act of 2000, signed by Bill Clinton and drafted by the man who today is President Obama’s Treasury Secretary, Tim Geithner.
We at Demand Side have noted that the very idea of investing in commodities is distorted. Commodities are not appropriate vehicles for investment, they should be the product of investment. Investing in commodities is speculation, and the rush into commodities creates a bubble, exacerbated by the easy money from the Fed. Demand Side also directed your attention, over the last half of 2011, to the improbably regular pattern of bunny hops in all commodity markets. The algorithm hop, we should call it.
That pattern was replaced by the inexorable rise Guilford mentions here.
And to be clear about this testimony, and perhaps adding rather than subtracting from its credibility, is to note that the peak in gasoline prices occurred on April 4, 2012, precisely the date this was recorded. We include a chart of the four major commodity indexes on the blog for your reference.
Now continuing with Gene Guilford
Behind Oil Price Rise: Peak Oil or Wall Street Speculation?
By F. William Engdahl
Sunday, Mar 18, 2012
the drop in oil demand and enhaced production should be pulling prices
down, fuel has never been more expensive. Engdahl dismisses explanations
linked to saber-rattling and the peak oil theory. He points instead an
accusing finger at oil price speculation and manipulation by Wall Street
banks, with the collusion of the Government Agency which should be
regulating their activities but whose chairman - a "former" Goldman
Sachs asset - has been asleep at the wheel.
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 rising price.
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
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
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
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 2011.
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 casino." 
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
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
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.
 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.
 Peter S. Goodman, "Behind Gas
Price Increases, Obama’s Failure To Crack Down On Speculators," The
Huffington Post, March 15, 2012.
 Tom Parfitt, "US ’tells Russia to warn Iran of last chance’," The Telegraph, 14 March 2012.
 Steve Levine, "Obama administration brushes off oil price impact of Iran sanctions," Foreign Policy, March 8, 2012.
 F. William Engdahl, "‘Perhaps 60% of today’s oil price is pure speculation’," Global Research, May 2, 2008.