George Carlin 1937-2008
All of us have been there. All of us have thought how sweet it would be.
You’re at the crap tables in Vegas or about to pull the lever on a “one armed bandit,”
and you think to yourself ... "wouldn’t it be great if this game was fixed in my favor." But then you toss the dice or yank down on the handle, and just like that … "snake-eyes" or "box cars."
Even though the odds are always stacked against us in Vegas or Atlantic City, we still play. We do it because we believe it’s a level playing field. We know there’s always somebody watching, whether it’s the state gaming commission or the “eye in the sky.” It may be gambling, but there are rules that make it equally hazardous for everyone.
The same can’t be said for the energy futures market.
By conservative calculations, at least 60% of today’s $138 per barrel price of crude
oil comes from unregulated futures speculation by hedge funds, banks and financial groups using the London ICE Futures (Intercontinental Exchange) and New York NYMEX futures exchanges and uncontrolled inter-bank or Over-The-Counter trading to avoid scrutiny.
US margin rules promulgated by Commodity Futures Trading Commission (CFTC) allow speculators to buy a crude oil futures contract on the Nymex, by having to pay only 6% of the value of the contract. At $138 per barrel, a futures trader only has to put up about $8 for every barrel leveraged. The trader “borrows” the other $130 to complete the speculative transaction. Although speculation adds liquidity to the markets, this liberalized leverage of roughly 17-to-1, has been a key component driving prices to the sky high levels we’re seeing today.
Although rising demand from China and India is well known, the problem may not be a lack of crude oil supply. In fact, there is ample evidence that there is net positive global surplus of oil. Yet the price climbs relentlessly higher. Why? In my opinion, the answer lies in what are clearly deliberate policies that have permitted unbridled oil price manipulation.
The US Government’s Energy Information Administration (EIA) in its most recent monthly Short Term Energy Outlook report, concluded that US oil demand is expected to decline by 190,000 b/d in 2008. This drop in demand is mainly owing to the deepening economic recession. Chinese consumption, the EIA says, far from exploding, is expected to rise this year by only 400,000 barrels a day. That is hardly the "surging oil demand" blamed on China in the media.
According to EIA, because of falling domestic demand, US, stockpiles of oil climbed by almost 12 million barrels in April. During the same period, retail gasoline demand fell by nearly 6%. Refiners are now running at about 85% of capacity, down from 89% a year ago. Normally, during this time of year, they would be running at about 95%
capacity.
That means the key oil consuming nation, the USA, is experiencing a significant drop in demand. China, which consumes only a third of the oil the US does, will see a only a minor rise in import demand compared with the total daily world oil output of some 84 million barrels, less than half of a percent of the total demand.
The chief problem faced by the major oil companies is not finding replacement oil, but keeping the lid on world oil finds in order to maintain present exorbitant prices. At today’s prices, the pressure to boost both domestic and international production has become dynamic. Here, the oil companies have some help from Wall Street banks and the two major oil trade exchanges—NYMEX and London-Atlanta’s ICE and ICE Futures.
The oil price today, unlike twenty years ago, is determined behind closed doors in the trading rooms of giant financial institutions like Goldman Sachs, Morgan Stanley, JP Morgan Chase, Citigroup, Deutsche Bank or UBS. The key exchange in the game is the London ICE Futures Exchange (formerly the International Petroleum Exchange). ICE Futures is a wholly-owned subsidiary of the Atlanta Georgia International Commodities Exchange.
ICE was focus of a recent congressional investigation. Through a convenient regulatory loophole known as the “Enron Exception,” the ICE Futures trading of US energy futures is not regulated by the Commodities Futures Trading Commission, even though the ICE Futures US oil contracts are traded by ICE affiliates in the U.S. In 2000, at Enron’s specific request, the CFTC exempted the Over-the-Counter oil futures trades.
We all know how that turned out, and now this gapping exception is coming back to haunt us.
In order to prevent unchecked market manipulation by producers and suppliers, CFTC regulations require traders to disclose the identity of their major trading clients. Under the “Enron Exception,” no such disclosure is required. It is this cloak of anonymity that has permitted over-the-counter speculators here and in London to drive prices with impunity.
Look … I believe in the free market. But when the game is rigged, who wants to play.
To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.
