America's Petro-Terrorists: How Speculators Drove Up Oil Prices

image
Illustration by Pete Ryan.


On July 11, 2008, the price of oil rose to $147 per barrel, a record high. Gas stations engaged in hot pursuit as the price of a gallon rocketed past $4. All hell was about to break loose.

The country's largest banks had already begun to implode through arrogance and ineptitude. Now the oil market had moved in with a thundering uppercut.

Former international securities lawyer Dennis Kelleher: “Wall Street is a high-crime area in which we basically have no cops on the beat.”
Charles Steck
Former international securities lawyer Dennis Kelleher: “Wall Street is a high-crime area in which we basically have no cops on the beat.”
William Black, former bank regulator turned economist at the University of Missouri-Kansas City: ““Nine of the largest financial institutions in the world pulled the pin on their own grenades.”
Michael Forester
William Black, former bank regulator turned economist at the University of Missouri-Kansas City: ““Nine of the largest financial institutions in the world pulled the pin on their own grenades.”

Airlines and trucking firms watched their costs punch through the roof. So did every other business great and small, since 90 percent of American goods are shipped in some form or another.

"That was the breaking point of the economy," says Tyson Slocum, director of the energy program at Public Citizen, a Washington, D.C., government watchdog group. "That's when businesses said they could no longer fuel their trucks, and that fuel costs were overwhelming their payroll."

So began a surge of layoffs that would push well into the next year.

America's political leaders could only muster a simpleton's response. Demand had outstripped supply, they claimed. And it was all the fault of radical environmentalists. If they'd only let us drill for more riches offshore — or on protected lands in Alaska — we could all go back to cranking Toby Keith in our Chevy Tahoes.

It was a fabulous, made-for-TV narrative. Who can forget Sarah Palin shaking her fist at the Republican convention, exhorting the legions to "Drill, baby, drill!" What began as a rallying cry soon became an article of faith at cafés and kitchen tables, executive suites and editorial meetings.

There was just one tiny problem: Absolutely none of it was true.

In four short years, the price of oil had risen nearly 400 percent. For this to be a natural occurrence, it would have required a sudden, massive increase in world oil consumption — coupled with equally massive shortages in production. None of which had happened.

"I asked the senior official at Goldman [Sachs] at the time. There were no supply and demand issues that could remotely explain the doubling and doubling again of oil prices," says Dennis Kelleher, a former international securities lawyer. "In order to justify that, it would literally take the discovery of China on the demand side, or the loss of Saudi Arabia on the supply end."

And those politicians who were bleating about environmentalists? What they conveniently forgot to mention was that millions of acres had already been approved for drilling in the U.S., but remained untouched. The demand just wasn't there.

The boys on Wall Street must have had a hearty laugh over this. After all, they knew oil prices had ceased to have anything to do with supply and demand. Eight years earlier, they'd been granted the right to make huge, unregulated bets in the oil markets. Now they'd driven gasoline to the brink, just as they had with the mortgage industry.

The funniest part: All those finger-pointing politicians were their accomplices. This was an inside job.


A SENATOR GOES WHORING
It happened on the night of Dec. 15, 2000. The country was in tumult over the Bush-Gore election. This diversion offered Republican Sen. Phil Gramm of Texas an exquisite opportunity to push American financial stability back 100 years.

That evening, Gramm inserted a 262-page amendment into the Commodities Futures Modernization Act. Leaked e-mails would later reveal that it had been written by lobbyists for Enron, Goldman Sachs, and the Koch brothers, Kansas billionaires who would later fund the Tea Party movement.

Gramm had turned his office into a subsidiary of Wall Street. From 1997 to 2002, the securities and banking industries had showered him with $640,000 in campaign contributions. His biggest sugar daddies weren't from Texas; they were Credit Suisse, Morgan Stanley, Bank of America, and Goldman. And he was more than willing to step-and-fetch-it on their behalf.

Big oil, big banks, and big speculators like the Kochs wanted to make monster bets in the futures markets. But they wanted to do it in secrecy — without any government regulation.

The futures markets are where the world trades its raw materials, from wheat to oil, coffee to cattle. They were designed not as toys for banks or speculators, but for merchants who actually use those products.

Before a farmer plants his oats in spring, he can agree to sell them to Kellogg at a set price come fall, the same way Southwest Airlines can lock in a price now for a delivery of fuel in January. This allows companies to set their costs and income long-term, so their businesses — and their customers — aren't regularly blown up by wild price swings. Everyone has a stake in keeping prices stable.

Which is why futures had been heavily regulated since the 1930s, when Wall Street last incinerated the U.S. economy. Up till then, speculators had regularly terrorized the country by artificially driving up prices and hoarding things like grain.

But the stock market crash of 1929 offered Congress a teachable moment. The men of Wall Street could not be trusted. It wasn't just their eagerness to screw their fellow countrymen. Their occasional bouts of breathtaking incompetence made them dangerous to themselves as well. So rigorous laws were enacted to protect both the nation and the banks that ran it.

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5 comments
Jeffrey J. Brown
Jeffrey J. Brown

Here is my short version of what I think is going on in global oil markets. Annual Brent prices doubled from $25 in 2002 to $55 in 2005. So, we had a strong price signal. And we saw a strong positive supply response, with global supplies of oil increasing across the board. Annual Brent prices doubled again, from $55 in 2005 to $111 in 2011 (with one year over year decline in 2009). In response, crude oil production was flat. We saw small increases in total petroleum liquids and total liquids (inclusive of low net energy biofuels), and we saw a material decline in Global Net Exports of oil (GNE) and in Available Net Exports (GNE less China & India's net imports), with the volume of oil that is available to importers other than China and India falling from 40 mbpd (million barrels per day) in 2005 to 35 mbpd in 2011. And on the demand side: Here is a chart showing normalized oil consumption from 2002 to 2010 (BP data) for China, India, top 33 net oil exporters and for the US: http://i1095.photobucket.com/albums/i475/westexas/Slide1-16.jpg The chart is not yet updated for 2011, but the trend on the chart continued in 2011, to-wit, China, India and the oil exporting countries showed increasing oil consumption as Brent prices doubled from $55 in 2005 to $111 in 2011, while consumption in the US (and in most other oil importing OECD countries) fell. Therefore, while slowly increasing US oil production will help, the dominant trend we are seeing is that the US, and most other developed oil importing OECD countries, are--so far at least --gradually being priced out of the global market for exported oil, as annual global (Brent) crude oil prices doubled from 2005 to 2011. For more info, you can do a search for: Peak Oil Versus Peak Exports.

Jeffrey J. Brown
Jeffrey J. Brown

Regarding speculators, here is something that has always puzzled me about the "Blame the speculators" theory. Let's stipulate, for the sake of argument, that the rascally speculators drove the annual average price of Brent crude from $55 in 2005 to $111 in 2011 (with a decline in 2009). Preceding this doubling in annual crude oil prices, there was another doubling, from $25 in 2002 to $55 in 2005. In response to the 2002 to 2005 doubling, the EIA shows that global crude oil production (Crude + Condensate) increased rapidly, from 67 mbpd (million barrels per day) in 2002 to 74 mbpd in 2005. At this rate of increase, we would have been at about 90 mbpd in 2011. However, the EIA shows that post-2005 annual global crude oil production has not exceeded 74 mbpd for six straight years, ranging between 72 and 74 mbpd. Here's my question: Even if the rascally speculators drove the price of oil up from 2005 to 2011, why did we see no global crude oil supply response?

Oscarcmpn
Oscarcmpn

Sure took a lot of words to say, Clinton signed Gramm Leach into law. Investors have used the law to their advantage. Results mixed, as usual. The rest is a lot of gasping and harrumphing. I agree with most of what you say, but think you did a lousy job of explaining how it works. You need to say more than "Koch brothers are bad" and "hedgefunds are evil." IMO

Smoking spirit
Smoking spirit

smokingspirit | 15 August, 2011 16:26 The Muslimization of America Ron Paul wins second place finish in Iowa straw poll loosing by less the 200 votes, but the press interviews the other candidates. Ron’s message just doesn’t get out there. We are left with the other candidates one who claims “we should fast (stare) and pray more” during Ramadan And the other who says the only difference between the “right wing and the talibomb is one is a cult,” but then America just needs more right wingers so when the Muslim plays the moral card the Christian is always suppose to lose. We have seen in the past that the American has to blow up mail boxes to get his message out but we never hear his message- We condemn the Arabs for shutting down the internet and yet when a cop kills a modern day Thomas Edison, Thomas Jefferson or Henry Ford (all illegal drug users) they shut down the internet to prevent peaceful protest in California- Time Magazine points out “the true science of weed is being subverted.” Least we forget that the Mormons are Anti-Smoking, Anti Drinking and it was in Texas they demanded that the people take the medical monopolies breathalyzer test not because the owner of the bar wanted the person out or that the person was driving but because he might be celebrating the blood of Christ the water of life or that Holy Spirit that does not fit into a computer, but take the test or be arrested! They put a temporary stop to this but no protections were added to stop them from next time, This will give them time to identify those who won’t join them, as they stack the population with more Muslims, We couldn’t have more Thai – Japan- Chinese or Pilipino girls, but we get more Muslim refugees and the population of freedom loving Americans continues to decline, Help keep the world free stop the medical monopoly(their foreign owned pharmaceutical companies and their secret Arab funding) it’s not too late to change our fate and stop these snakes before they turn this world into another anti drinking- anti smoking state. From their nicotine patch to their Parkinson’s drug they don’t just make designer steroids for the jocks and with two shooting a night in almost every city they are just not helping these people out. Americans use to have the largest saving in the world but they work to run the decedent American broke, or just join the 700 club and you too can prosper, the middle class has been under attack for too long, Disaster economics ( Harper Magazine) is no longer just for the individual as we saw in New Orleans. We could have fuel at $ 0.98 per gallon if weed was legal- yet we have to pay the Arabs $4.00 per gallon as They work to eliminating the decedent American, will you join them in order to prosper or will you make a stand for freedom and liberty read more in the book About - Christians and freedom @amazon.com or An opening for the living @ Amazon.com or Visit our web site @ www.SMOKINGSPIRIT123.com

 
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