by Randolph T. Holhut
American Reporter Correspondent
June 15, 2009
TIME TO REIN IN THE OIL SPECULATORS
DUMMERSTON, Vt. -- So, why is the price of crude oil now trading above $70 a barrel?
Oil inventories are near record highs and demand has hovered around a 10-year low. The normal rules of supply and demand would dictate a lower price.
But those rules don't seem to apply anymore. Americans are paying more for gasoline and heating oil because speculators are driving up prices by betting hundreds of billions of dollars on oil futures contracts. Last year, these speculators caused massive swings in oil prices. In the 12-month period that ended in July 2008, oil prices rose from $70 a barrel to a record $147, then collapsed below $40 by last fall amid the global financial crisis.
How? Through the use of derivatives, which are bets that derive their value based on future prices of some underlying asset - such as oil contracts, interest rates, currency or even bonds and other forms of credit. If the value rises to the future price you bet on, you win. If it doesn't, you can lose big.
In 2000, Congress effectively deregulated the futures market, granting exemptions for complicated derivative investments called oil swaps and causing an explosion in this type of trading. When the global financial system nearly collapsed during the last four months of 2008, it was because firms like insurance giant American International Group had issued trillions of dollars in insurance-like private derivatives contracts and had insufficient reserves to cover its losses. The Federal Reserve and the Treasury Department needed to rescue AIG and other financial firms caught up in this shell game.
Speculators like Goldman Sachs, Morgan Stanley, Citigroup and JP Morgan Chase & Co. are able to control refineries, pipelines and storage facilities to manipulate prices. What's even more galling is that the investment banks taking bailout money from the federal government - such as Citigroup, Morgan Stanley and JP Morgan Chase - are the ones that are actively manipulating the energy markets to doubly rip off the American people.
Here in Vermont, the price of heating oil is a literally matter of life and death. When fuel oil prices hit $4 a gallon in the winter of 2007-08, many families had to choose between keeping their homes warm and having food to eat. Elderly residents had to choose between medications or keeping the oil tank full. Demand for fuel assistance was at an all-time high. Prices eased somewhat this past winter, but the high cost of heating still caused an enormous strain on many people's budgets.
But the investment banks and hedge funds don't particularly care if someone freezes to death in Vermont. The way they play the game, the only thing that matters is continuing to make obscene profits.
It's estimated that as much as 60 percent of the price of oil is a direct result of speculation. And as much as 70 percent of the oil contracts in the futures markets are now held by speculative entities. This is a recipe for price gouging.ing to Reuters, global diesel storage at sea has climbed to about 41 million barrels, and Bloomberg News reported this week that seven tankers with an estimated 14 million barrels of North Sea crude are anchored off Great Britain. JP Morgan Chase recently hired a ship to store up to 2 million barrels of heating oil off the coast of Malta.
"These companies are hoarding heating oil right now, in the hope of selling it at a higher price this winter when senior citizens on fixed incomes and middle class Americans in cold-weather states need heating oil to stay warm," Vermont Sen. Bernard Sanders said this week.
Last week, Sanders introduced legislation to require the federal Commodity Futures Trading Commission to use emergency powers to stem oil price manipulation and force big oil traders to divulge reserves they are holding in offshore tankers to drive up prices. It's a good start, but what's really needed is for Congress to restore transparency to the futures market, where energy prices are set. Stronger regulations over energy trading markets would clamp down on speculators and limit their ability to drive up oil prices.
Before we have another winter where people in the Northeast get stuck paying $4 a gallon for heating oil because a handful of greedy traders are manipulating prices, Congress must take action and re-regulate the energy trading markets.
Randolph T. Holhut has been a journalist in New England for nearly 30 years. He edited "The George Seldes Reader" (Barricade Books). He can be reached at firstname.lastname@example.org. For extra added thrills, read his ongoing daily blog on The Harvard Classics at http://hclassics15.blogspot.com.