The CFTC’s move against oil speculators who criminally profited from driving up prices in 2008 has put into sharp relief the current state of the oil markets, and the role of speculation. But according to some Wikileaked documents, Saudi Arabia told the US as far back as 2007 that speculation was artificially spiking prices, which should have triggered CFTC enforcement at the time.
When oil prices hit a record $147 a barrel in July 2008, the Bush administration leaned on Saudi Arabia to pump more crude in hopes that a flood of new crude would drive the price down. The Saudis complied, but not before warning that oil already was plentiful and that Wall Street speculation, not a shortage of oil, was driving up prices.
Saudi Oil Minister Ali al Naimi even told U.S. Ambassador Ford Fraker that the kingdom would have difficulty finding customers for the additional crude, according to an account laid out in a confidential State Department cable dated Sept. 28, 2008,
“Saudi Arabia can’t just put crude out on the market,” the cable quotes Naimi as saying. Instead, Naimi suggested, “speculators bore significant responsibility for the sharp increase in oil prices in the last few years,” according to the cable.
George W. Bush himself was told about this bank and hedge fund speculation. But his Administration promptly ignored the Saudi entreaties. Their regulators were too busy ignoring the risk of mortgage-backed securities and credit default swaps CDOs.
It took the Obama Administration years to build a case against a few financial firms for their role in the 2008 oil spike, but at least they’ve gotten around to it. The people most equipped to know the existence of the problem were screaming to the government at the time that speculation, not supply and demand, was driving prices.
The CFTC under Obama could go further. They need to set position limits to restrict the number of oil futures contracts one company can hold; they had a deadline of January 2011 to create them. Hilariously, this is what the Saudis recommended in the Wikileaks cables. The CFTC also needs to increase margin requirements for oil futures. They have the tools under Dodd-Frank to get the over-speculation out of the system. The FTC could join in by levying civil fines against oil speculators for market manipulation, up to $1 million a day under current law. Here’s Sen. Maria Cantwell (D-WA) in a floor speech from yesterday:
It should be no surprise of what they actually see in this case [$50 million oil manipulation case], because it’s the same shenanigans that happened in electricity, the same shenanigans in natural gas. Yes, the same shenanigans are happening in the oil market. That is that the commodity agency says in this case there was a close relationship between the physical oil price and the price of the financial futures which moved in peril. So basically what happened is that in the oil futures market, these individual companies took large positions. In fact, their positions were so big – and that’s why Senator Wyden just described if this agency would come in and set position limits, people wouldn’t be able to come in and move the market in such a significant way.
Our economy is too important to have this kind of activity continue to play the kind of havoc that it is on our system. And when you think about it, it’s not as if we don’t know what the scheme is. We have seen it time and time again with these other energy markets. So the question is whether we’re going to be aggressive and make sure that the CFTC has the tools it needs — that is not to cut funding like the Ryan budget or H.R. 1 wants to do – and that it actually takes this role and responsibility and starts setting position limits, starts the day-to-day activity.
But that market which was created after the dust bowl devastated so many farmers to give them a chance to legitimately hedge, now all of a sudden is captured by these large financial institution players. …Seventy percent of the market are these large players … who are people who are out there basically using their financial weight to move the market in a direction that then they can sell on the futures market to benefit from. It’s outrageous. It is outrageous that our economy has to put up with this – that individuals have to put up with this.
The Saudis actually predicted the oil price shock, led by speculation, back in 2009. This is Enron, take two. Federal regulators have the ability to stop it right now, with no additional authority.





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In what corner of industry and government is there not corruption these days?
Cantwell voted for the Iraq war she’s part of the problem.
Of course, speculation raised the price of oil in the short term. It could not have been sustained unless the demand for oil exceeded the supply. Oil contracts must be fulfilled by the delivery of product, and storage capabilities are limited. (Holding the oil in storage has a larger impact in local markets.) One can play the futures market on the false expectation of higher prices.
Eventually, the high prices helped precipitate the Great Recession and worldwide demand declined to a level below supply. At that time, the speculative prices crashed as the short contractor holders tried to sell them before they had to deliver.
We definitely need to control speculators, but speculation is a secondary problem, which is made possible by growing demand of a product that has reached maximum production levels. (Even with the enormous runups of price, the production levels
didcould not rise.)We will repeat this cycle of speculation and recession until we get our act together and curb our demand.
Those two things are not mutually exclusive. It was the speculators giving the appearance of a shortage of oil which drove the price up as the civil case is enitely dependent on them not being mutually exclusive.
If it wasn’t about speculators controlling the supply, the government would have no case. The CFTC themselves says that it is about supply and demand:
“They wanted to lull market participants into believing that supply would remain tight,” the CFTC said. “They knew that as long as the market believed that supply was tight and getting even tighter, there would be upward pressure on the prices of WTI for February delivery relative to March delivery, which was their goal.”
http://news.firedoglake.com/2011/05/25/cftc-charges-oil-traders-in-2008-speculation-scheme/
Some good points, cobernicus, but it’s clear that there was no supply issue, because even AFTER the recession hit the prices kept going up. Note also that there were no added costs in getting the oil to market, the wells were already drilled, the refineries were already oerating, and so on. So, it is not really supply that drove prices but rank speculation (possibly fueled by the oil barons).
However, cobernicus’ solution is sound. In the long term, we need to get off the oil, a point so obvious even Shrub noted it in the SOTU address [of course he actually did nothing, but it’s interesting he would have even mentioned it), and one may look to see how Brazil is doing on the half-step (in my view) ethanol solution. At that point the peak oil issue becomes moot.
Heh. Let’s go back even farther in time to August 2004 when many analysts recognized speculation in oil futures.
“Are Speculators Driving Up The Price Of Oil?” (Bloomberg Business Week, Aug. 30, 2004)
The Federal Reserve was forced to notice because Congress brought Greenspan before them for testimony on the subject (the bold is my emphasis):
(excerpt from “What Is Driving Oil Prices?,” Federal Reserve Bank of St. Louis, Jan. 2005)
(excerpt from “Energy hedge funds multiply” (MarketWatch.Com, Apr. 11, 2005)
Where do I apply for my refund? I paid $4.14 a gallon for home heating oil in August of 2008, before they said whoops and the financial house of cards started to collapse. But the Saudis warning us about market manipulation cracks me up. When I got my driver’s permit in Nov. 1974, gas was 33.9 cents a gallon. A month later when I got my license – gas was 74.9 cents a gallon due to OPEC’s oil embargo. During the next embargo – 1981 – we were rationed into even/odd gas availability by the numbers on our license plates and long lines at the gas stations were common.
I remember the 1976 “Energy Crisis” in oil producer and refinery mecca, Texas. The prices were just higher s.t folks thought it was a crisis but there were no lines and no rationing in my area that I heard of.
Fairly recently I have discovered that the company under the green version of Dino the Dinosaur was still around and in Dick Cheney’s state. Further, Sinclair Oil Corporation’s gas prices were enough lower than everyone else’s that it was head-turning. Perhaps one of the reason for that is the refinery in Cheyenne, WY:
Nevertheless, I have noticed that gas price ease down toward the time of a major election then go back up. I do like your idea of a refund.
the senate didn’t need the saudis to tell them because the senate knew about the role of excessive oil speculation at least by 2006. carl levin even sent out a press release.
http://hsgac.senate.gov/public/_files/SenatePrint10965MarketSpecReportFINAL.pdf
and i asked levin about his ineffective “efforts” to provide a legislative fix when he visited fdl in 2008:
http://firedoglake.com/2008/07/15/fdl-welcomes-senator-carl-levin-to-talk-about-ongoing-senate-investigation-into-detainee-abuse/#comment-1542284
The price of crude did crash (unless you don’t consider an 80% drop a crash.) It started going up again as the world economy adjusted to the global recession and demand started to increase (especially in China, India, etc.)