"In a time of universal deceit telling the truth is a revolutionary act." -George Orwell

Unchecked Financial Speculation Drives Oil Price Hikes; Is There A Scam Behind The Rise In Oil And Food Prices?

In Uncategorized on May 13, 2011 at 1:50 pm

Oldspeak“Approximately 60 to 70 percent of the oil contracts in the futures markets are now held by speculative entities. Not by companies that need oil, not by the airlines, not by the oil companies. But by investors who profit money from their speculative positions.” –Dan Gilligan, president of the Petroleum Marketers Association.  It’s a scam folks, it’s nothing but a huge scam and it’s destroying the US economy as well as the entire global economy but no one complains because they are ‘only’ stealing about $1.50 per gallon from each individual person in the industrialized world.” –Phil Davis, Financial Expert. The debate in washington over cutting oil subsidies is another manufactured issue, diverting attention from the true cause of rising oil and commodities prices; unregulated, unchecked financial speculation and derivatives trading. Coincidentally the cause of the recent crash of the global economic system. Recently passed “financial reform” did nothing to reform this fatally flawed financial system. A simple and totally correctable (stricter regulation) flaw; corporate media, corporate economists,  no one is talking about it. “no one wants to talk about, because so many powerful people armed with legions of lawyers want unquestioning allegiance, and will sue you into silence.”- Danny Schechter. High gas prices are being used by Big Oil and their minions in the Congress to push for more offshore drilling, and as a grab of oil production by major multinationals from smaller oil companies. Naked oligarchy rules the day in America.

By Danny Schechter @ The News Dissector:

The global economy and its recovery, and the living standards of millions of plain folks, are now at risk from the sudden rise in oil and commodity prices.

Gas at the pump is up, and going higher. Food prices are following.

The consequences are catastrophic for the global poor as their costs go up while their income doesn’t. It’s menacing American workers too, who in large part have not seen a meaningful raise since the days of Reagan (keeping it this way is clearly behind the current flurry of attacks on unions).

Already, unrest in the Middle East and many African countries is being blamed for these dramatic increases. It seems as if this threat to global stability is being largely ignored in our media, one that treats the oil business as just another mystical world of free market trading.

Why is it happening? Why all the volatility? Is oil getting scarcer, leading to price increases? Is the cost of food, similarly, a reflection of naturally increasing commodity prices?

While it’s true that natural disasters and droughts play some role in this unchecked price inflation, it also seems apparent that something else is attracting increasing attention, even if most of our media fails to explore what is a political time bomb, while most political leaders shrug their shoulder and ignore it.

President Obama recently said there is nothing he can do about the hike in oil and food prices.

Critics say the problem is that government and media outlets alike refuse to recognize what’s really going on: unchecked speculation!

Not everyone buys into this suspicion. In fact, it is one of more intense subjects of debate in economics. Princeton University economist Paul Krugman pooh-poohs the impact of speculation counter posing the traditional argument that oil prices are set by supply and demand.

The Economist Magazine agrees, summing up its views with a pithy phrase, “Speculation does not drive the oil price. Driving does.”

Others, like oil industry analyst Michael Klare of Hampshire College in the US see demand outdistancing supply:

“Consider the recent rise in the price of oil just a faint and early tremor heralding the oilquake to come. Oil won’t disappear from international markets, but in the coming decades it will never reach the volumes needed to satisfy projected world demand, which means that, sooner rather than later, scarcity will become the dominant market condition.”

Usually you hear this debate in scholarly circles or read it in political tracts where orthodox views collide with more alarmist projections about the oil supply “peaking.”

But officials in the Third World don’t see the subject as academic. Reserve Bank of India Governor Duvvuri Subbarao charges “Speculative movements in commodity derivative markets are also causing volatility in prices,” he said.

The World Bank is meeting on this issue this week because it is seen as a matter of “utmost urgency.”

“The price of food is a matter of life and death for the very poorest people in the world,” said Tom Arnold, CEO of Concern Worldwide, the international humanitarian agency, ahead of his participation at The Open Forum on Food at World Bank headquarters.

He adds, “…with many families spending up to 80% of their income on basic foods to survive, even the slightest increase in price can have devastating effects and become a crises for the poorest.”

Journalist Josh Clark argues on the website “How Stuff Works” that much of the oil speculation is rooted in the financial crisis, “The next time you drive to the gas station, only to find prices are still sky high compared to just a few years ago, take notice of the rows of foreclosed houses you’ll pass along the way. They may seem like two parts of a spell of economic bad luck, but high gas prices and home foreclosures are actually very much interrelated. Before most people were even aware there was an economic crisis, investment managers abandoned failing mortgage-backed securities and looked for other lucrative investments. What they settled on was oil futures.”

The debate within the industry is more subdued, perhaps to avoid a public fight between suppliers and distributors who don’t want to rock the boat. But some officials like Dan Gilligan, president of the Petroleum Marketers Association, representing 8,000 retail and wholesale suppliers has spoken out.

He argues, “Approximately 60 to 70 percent of the oil contracts in the futures markets are now held by speculative entities. Not by companies that need oil, not by the airlines, not by the oil companies. But by investors who profit money from their speculative positions.”

Now, a prominent and popular market analyst is throwing caution to the wind by blowing the whistle on speculators.

Finance expert Phil Davis runs a website and widely read newsletter to monitor stocks and options trades. He’s a professional’s professional, whose grandfather taught him to buy stocks when he was just ten years old.

His website is Phil’s Stock World, and stocks are his world. He’s subtitled the site, “High Finance for Real People.”

He is usually a sober and calm analyst, not known as maverick or dissenter.

When I met Phil the other night, he was on fire, enraged by what he believes is the scam of the century that no one wants to talk about, because so many powerful people armed with legions of lawyers want unquestioning allegiance, and will sue you into silence.

He studies the oil/food issue carefully and has concluded, “It’s a scam folks, it’s nothing but a huge scam and it’s destroying the US economy as well as the entire global economy but no one complains because they are ‘only’ stealing about $1.50 per gallon from each individual person in the industrialized world.”

“It’s the top 0.01% robbing the next 39.99% – the bottom 60% can’t afford cars anyway (they just starve quietly to death, as food prices climb on fuel costs). If someone breaks into your car and steals a $500 stereo, you go to the police, but if someone charges you an extra $30 every time you fill up your tank 50 times a year ($1,500) you shut up and pay your bill. Great system, right?”

Phil is just getting started, as he delves into the intricacies of the NYMEX market that handles these trades:

“The great thing about the NYMEX is that the traders don’t have to take delivery on their contracts, they can simply pay to roll them over to the next settlement price, even if no one is actually buying the barrels. That’s how we have developed a massive glut of 677 Million barrels worth of contracts in the front four months on the NYMEX and, come rollover day – that will be the amount of barrels “on order” for the front 3 months, unless a lot barrels get dumped at market prices fast.”

“Keep in mind that the entire United States uses ‘just’ 18M barrels of oil a day, so 677M barrels is a 37-day supply of oil. But, we also make 9M barrels of our own oil and import ‘just’ 9M barrels per day, and 5M barrels of that is from Canada and Mexico who, last I heard, aren’t even having revolutions. So, ignoring North Sea oil Brazil and Venezuela and lumping Africa in with OPEC, we are importing 3Mbd from unreliable sources and there is a 225-day supply under contract for delivery at the current price or cheaper plus we have a Strategic Petroleum Reserve that holds another 727 Million barrels (full) plus 370M barrels of commercial storage in the US (also full) which is another 365.6 days of marginal oil already here in storage in addition to the 225 days under contract for delivery.”

These contracts for oil outnumber their actual delivery, a sign of speculation and market manipulation, as oil companies win government authorizations for wells but then don’t open them for exploration or exploitation. It’s all a game of manipulating oil supply to keep prices up. And no one seems to be regulating it.

What Phil sees is a giant but intricate game of market manipulation and rigging by a cartel—not just an industry—that actually has loaded tankers criss-crossing the oceans but only landing when the price is right.
“There is nothing that the conga-line of tankers between here and OPEC would like to do more than unload an extra 277 Million barrels of crude at $112.79 per barrel (Friday’s close on open contracts and price) but, unfortunately, as I mentioned last week, Cushing, Oklahoma (Where oil is stored) is already packed to the gills with oil and can only handle 45M barrels if it started out empty so it is, very simply, physically impossible for those barrels to be delivered. This did not, however, stop 287M barrels worth of May contracts from trading on Friday and GAINING $2.49 on the day. “

He asks, “Who is buying 287,494 contracts (1,000 barrels per contract) for May delivery that can’t possibly be delivered for $2.49 more than they were priced the day before? These are the kind of questions that you would think regulators would be asking – if we had any.”

The TV news magazine 60 Minutes spoke with Dan Gilligan who noted that, investors don’t actually take delivery of the oil. “All they do is buy the paper, and hope that they can sell it for more than they paid for it. Before they have to take delivery.”

He says they make their fortunes “on the volatility that exists in the market. They make it going up and down.”

Payam Sharifi, at the University of Missouri-Kansas City, notes that even as the rise in oil prices threatens the world economy, there is almost total silence on the danger:

“This issue ought to be discussed again with a renewed interest – but the media and much of the populace at large have simply accepted high food and oil prices as an unavoidable fact of life, without any discussion of the causes of these price rises aside from platitudes.”

What can we do about that?

News Dissector Danny Schechter wrote an introduction to the recent reissue of a classic two-volume expose of John D. Rockefeller’s The Standard Oil Company, one of the top ten works top works of investigative reporting in America. (Cosimo Books) Comments to dissector@mediachannel.org

Despite Rhetoric, Cutting Oil Subsidies Would Have Little Effect on Gas Prices

By Nicholas Kusnetz @ Pro Publica:

Democrats renewed their push to cut oil subsidies this week, saying high gasoline prices and big revenues for oil and gas companies make this as good a time as any to eliminate billions in annual tax incentives to the industry. Republicans countered that higher taxes on oil companies would only mean higher prices for consumers.

Most experts agree, however, that the tax incentives in question don’t have much effect on gasoline prices, one way or the other.

“The impact would be extremely small,” said Stephen Brown, a professor of economics at the University of Nevada, Las Vegas. Brown co-wrote a study in 2009 arguing that if the subsidies were cut, the average person would spend, at most, just over $2 more each year on petroleum products.

This isn’t the first time Congress has debated the pros and cons of cutting the tax subsidies. President Obama has proposed eliminating some $4 billion in subsidies in each of his annual budgets since entering office in 2009 (the liberal Center for American Progress has a good breakdown of the President’s proposal). Senate Democrats this week introduced an alternative plan that would cut a little more than half as much, by targeting only the largest oil companies.

From the beginning, the Treasury Department has said the President’s proposal would raise prices at the pump by less than a cent per gallon at most. Brown’s study, produced for the non-partisan think tank Resources for the Future, came up with similar results. Even the American Petroleum Institute, which opposes cutting the subsidies, said in a press release on Monday that eliminating them wouldn’t affect gas prices.

The argument offered by Senate Majority Leader Mitch McConnell and other Republicans who oppose cutting the incentives is that it would drive up costs for oil and gas companies and ultimately reduce production and supply, leading to higher prices. (Domestic production, incidentally, has increased 10 percent over the last two years, and more oil wells were drilled in the U.S. last year than in any since 1985.)

As the Treasury Department’s analysis showed, the numbers don’t support McConnell’s assertion. Treasury’s Alan B. Krueger told a congressional subcommittee in 2009 that cutting tax incentives to the oil industry would raise costs by less than 2 percent and lead to a reduction in output of only one half of one percent. The United States produces about 10 percent of the world’s oil supply and holds less than 2 percent of global reserves. Since oil is a globally-traded commodity, a small drop in U.S. production would have an even smaller effect on the global price of oil.

In its 2012 budget proposal, the Obama Administration said cutting a number of tax breaks for the oil and gas industry would save more than $43 billion over the next decade. Republicans have opposed attempts to pass those subsidy cuts, most recently byrejecting attempts to attach them to a series of Republican-sponsored bills that aim to expand domestic drilling. On Tuesday, Senate Democrats introduced a bill that would cut subsidies only for the five biggest oil and gas companies, a more targeted plan that sponsors say would save $21 billion over the next 10 years.

There are other reasons why people support or oppose cutting these subsidies, including their effect on the budget deficit, job creation, reliance on foreign oil and interference in the free market. The President’s proposal could also shift more production from smaller oil companies, which tend to operate less productive wells, to the big multinationals, said Brown, the University of Nevada economist. The National Journal hosted a blog forum last week that gets into many of those arguments. Today, the Senate Finance Committee will host CEOs from the big five oil companies to discuss the topic.

Gas prices also have been the rallying cause for another set of proposals in Congress that would speed permitting and expand offshore drilling. House Republicans passedtwo of those bills in the last couple of weeks. A number of studies and reports have argued that the biggest of those proposals, expanded offshore drilling, probably wouldn’t affect gasoline prices much either.



  1. Based on your presentation about speculating, you infer the assumption that because one speculates with a Oil Futures Contract, that he or she will be profitable. I can assure you, based on my own experience, this absolutely is not the case. Most speculators lose their investment. Most speculators haven’t a clue how the markets work and it is a zero sum game. For every long, their is a short.

    Now with respect to huge corporations that purchase hundreds of contracts at a time, I
    honestly don’t know how that affects the Market. I have read up on this and there is an
    argument for each side. I do believe that powerful entities can sway the market place somewhat, but to what degree, I don’t know.

    One other thing. If you are going to blame speculators for driving the price up, then you must also give them credit for driving the price down. It is my belief that the market has a natural ebb and flow to it, and will seek whatever level need be in time.

    WD Gann, one of the greatest Traders of all time, believed the markets were driven by Math, human behavior and time. You must understand a fundamental of the market, it will always at some point, return to it’s 50% retracement. There was a comment posted that someone pointed out that the Banks were short the market just before the 2008 crash. It was clear that the market was to an extreme, in this case, price was long and to the extreme side, it had only one way to go, and that was down. The Banks were merely anticipating the fall. You didn’t need to be a genius to figure that out. The Dow hit slightly over 14,000; it fell to just below it’s 50% retracement (7,000) at 6400 and came back up, just like it should have.

    For price to rise it has to fall, and the opposite is true. Oil or any other commodity cannot sustain itself to one extreme side of the market or the other because it will run out buyers, overbought, or sellers oversold. It has to have flux for it to maintain itself. So to state that the speculators have control of the marketplace and the power to control prices for a sustained length of time, I think is a stretch. I believe for the most part, fundamentals usually rule.

    One last thing, true speculators who understand the market are not concerned about market direction, because they can make money long or short. There is no conspiracy to drive it one way or the other, there main concern is to be on the profitable side of the trade, something much easier said than done.

    • Thank for your comment! I appreciate and respect your experience. Yes I blame speculators for driving prices up and down, both outcomes have negative consequences. Huge corporations buying up hundreds of contracts at a time and holding/selling them enable price manipulation. (Local food producers usually get shafted if food prices are artificially low/high.) Yes, fundamentals usually rule & I don’t have a that big a problem with banks and speculators anticipating changes in the market. I have a problem with them precipitating and creating the conditions (via collusion, bribery, bad faith sales of toxic products, widespread fraud, money laundering, etc) for extreme and swift changes in the market, profiting handsomely from them, while people with no ostensible connection to the market starve, go homeless, jobless and broke. My problem is with the market, the system itself. It encourages and rewards these kinds of illegal behaviors. It is the nature of any corporate entity. Externalize cost, internalize profit, at all costs. See Inside Job. Powerful entities ABSOLUTELY sway the market place to a SIGNIFICANT degree. This didn’t all just happen in the context of a ‘naturally occurring’ ebb and flow of the market.

  2. […] Unchecked Financial Speculation Drives Oil Price Hikes; Is There A Scam Behind The Rise In Oil And F… […]

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