Speculation Helping Keep Price of Oil Stratospheric

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As the price of oil jumped above $100 per barrel last week, pundits were falling over themselves to come up with explanations for the price spike.

Maybe it was that oil-refinery explosion in Texas, they said.
Or maybe it’s because Venezuela is about to cut off oil shipments to
the United States. Or maybe it’s because OPEC is going to slash

None of those ideas passes the sniff test:

– There was a fire at a tiny refinery in Texas, but it affected
only 70,000 barrels of crude oil a day, .004 percent of the daily
production in the United States or .0008 percent of the world’s daily
consumption. That’s hardly enough to make oil rise as high as $100.74
per barrel before settling down to a still-stratospheric $98.75 at the
close of the week.

– Venezuela’s Bush-hating President Hugo Chavez did threaten an
embargo of the United States this month, but by the time oil was
nearing the $100 mark, he had already backed down, as was expected.

– The Organization of Petroleum Exporting Countries will
probably vote to trim its production at its meeting March 5, but that’s
no big news. Demand for oil typically recedes in spring, and it may
drop more than normal if the global economy slows. OPEC is simply
re-jiggering its output to make sure its supply doesn’t outstrip

Why have oil prices jumped so much?

There are solid reasons why the price of oil should be high.
There’s a finite supply of easily accessible oil, and there’s strong
and rising demand from places such as China and India.

But there seems to be no fundamental reason that prices should be this high.

"If we are going into an economic slowdown, you could make the
case that the price of oil should be in the low $80s," said Bruce Zaro,
who specializes in energy and other investments as the chief technical
strategist at Delta Global Advisors in Huntington Beach.

But considering the way oil has been trading lately, Zaro said, it’s likely that the price could rise as high as $112.

So, again, why are prices so high?

One answer: speculation.

The past dozen years have been a daisy chain of speculative
bubbles and bursts, starting with the investments in obscure foreign
currencies — such as the Thai bhat — that provoked the Asian economic
crisis of 1997 and 1998.

Now, the same folks who drove up currencies in the mid-1990s,
dot-com stocks in the late 1990s and housing prices in the early 2000s
are at work with oil and other commodities, seeking other
get-rich-quick investments.

Each bubble has been fueled by easy money from the Federal
Reserve and other central banks. Each time a bubble pops, the bankers’
answer has been to pump more money into the economy, inflating the next

It’s hard to track exactly how much speculation is in the
market now, partly thanks to an item known as the Enron Loophole. But a
congressional study in 2006 estimated that as much as $20 in the
then-record oil price of $70 per barrel
came from speculation. If that ratio is still true, the nonspeculative
price of oil would be $70.54 instead of the current $98.75.

A sustained bubble in the price of oil can inflict major pain.
It could arguably push an already-weakened global economy into

"What’s scariest about this — and everyone knows this in their
gut — is that when you see high oil prices that are sustained for any
period of time, bad economic things tend to happen," said Charles
Langley, a gasoline specialist at San Diego’s Utility Consumers’ Action

"The last time oil got this high (in inflation-adjusted prices)
was in the early 1980s, when there was some of the worst inflation and
unemployment I’ve seen in my lifetime," Langley said.

Making matters worse, we don’t even know who these speculators
are or what motives they might have. In the past, some speculators have
been known to manipulate the market, maximizing the price of energy for
their own purposes.

In 2006, for instance, a hedge fund known as Amaranth
intentionally manipulated the natural gas futures market in order to
make money from short sales. Joseph Kelliher, a member of the Federal
Energy Regulatory Commission, found that the company’s actions "created
losses that ultimately hurt natural gas customers across the country."

Which brings us back to the Enron Loophole.

Oil speculators have been partly shielded from regulatory
oversight since 2000, when lobbyists for the now-defunct energy giant
Enron helped persuade Congress to change the way the government
regulates energy trading.

Although oil, gas and electricity are all commodities, the
Enron lobbyists successfully argued that computerized energy trading
should be exempt from federal regulations that apply to other
commodities. That opened the door to uncontrolled speculation in

In California, the effects of the loophole were immediate. With
no regulatory oversight, Enron and other energy-trading giants
manipulated the markets — creating blackouts and brownouts throughout
the state — to push electricity prices sky-high. The high prices
generated strong profits for Enron and the speculators who followed its

Enron and many of its partners in crime have long since gone belly up. But the Enron Loophole remains in effect.

That could soon change. A House and Senate conference committee
is reviewing the Close the Enron Loophole Act, a Senate initiative
spearheaded by Dianne Feinstein, D-Calif.; Carl Levin, D-Mich.; and
Olympia Snowe, R-Maine.

The act, which passed the Senate unanimously, would subject
energy traders to the same rules as other commodities traders,
including greater transparency in trading and a ceiling on the number
of contracts that one trader can hold at a time.

Traders who violate the rules would trigger a federal
investigation, aimed at ensuring that there’s no market manipulation or
excessive speculation. Theoretically, that could have helped regulators
keep Amaranth from what it was doing.

"The Enron Loophole makes it impossible for regulators to
prevent major price distortions in U.S. energy markets," Levin said.
"The result has been higher energy prices for millions of Americans…
We need to put the cop back on the
beat in all U.S. energy markets with effective tools to stop price
manipulation, excessive speculation and trading abuses."

Judy Dugan, who tracks energy issues at the Foundation for
Taxpayer and Consumer Rights in Santa Monica, estimates that the Close
the Enron Loophole Act could take $15 to $20 a barrel off the current
price of oil, as speculators who want to keep their trading secret flee
the market.

Dugan’s estimate could be overly optimistic. But with unleaded
gasoline in San Diego selling for an average of $3.31 gallon — 19
cents shy of its all-time record — anything could help.

Consumer Watchdog
Consumer Watchdoghttps://consumerwatchdog.org
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