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2 Speculators knock OPEC off
oil-price perch By F William
Engdahl
The price of crude oil today is
not made according to any traditional relation of
supply to demand. It is controlled by an elaborate
financial market system as well as by the four
major Anglo-American oil companies. As much as 60%
of today's crude oil price is pure speculation
driven by large trader banks and hedge funds. It
has nothing to do with the convenient myths of
Peak Oil. It has to do with control of oil and its
price. How?
First, the role of the
international oil exchanges in London and New York
is crucial to the game. Nymex in New York and the
Intercontinental Exchange (ICE) Futures in London
today control global benchmark oil prices which in
turn set most of the freely traded oil cargo. They
do so via oil futures contracts on two
grades of crude oil -
West Texas Intermediate and North Sea Brent.
A third rather new oil exchange, the Dubai
Mercantile Exchange (DME), trading Dubai crude, is
more or less a daughter of Nymex, with Nymex
president James Newsome sitting on the board of
DME and most key personnel British or American
citizens.
Brent is used in spot and
long-term contracts to value much of crude oil
produced in global oil markets each day. The Brent
price is published by a private oil industry
publication, Platt's. Major oil producers
including Russia and Nigeria use Brent as a
benchmark for pricing the crude they produce.
Brent is a key crude blend for the European market
and, to some extent, for Asia.
West Texas
Intermediate (WTI) has historically been more of a
US crude oil basket. Not only is it used as the
basis for US-traded oil futures, but it is also a
key benchmark for US production.
The
tail that wags the dog All this is well and
official. But how today's oil prices are really
determined is done by a process so opaque only a
handful of major oil trading banks, such as
Goldman Sachs or Morgan Stanley, have any idea who
is buying and who is selling oil futures or
derivative contracts that set physical oil prices
in this strange new world of "paper oil".
With the development of unregulated
international derivatives trading in oil futures
over the past decade or more, the way has opened
for the present speculative bubble in oil prices.
Since the advent of oil futures trading
and the two major London and New York oil futures
contracts, control of oil prices has left the
Organization of the Petroleum Exporting Countries
(OPEC) and gone to Wall Street. It is a classic
case of the "tail that wags the dog".
A
June 2006 US Senate Permanent Subcommittee on
Investigations report on "The Role of Market
Speculation in rising oil and gas prices" noted,
"... there is substantial evidence supporting the
conclusion that the large amount of speculation in
the current market has significantly increased
prices".
What the senate committee staff
documented in the report was a gaping loophole in
US government regulation of oil derivatives
trading so huge a herd of elephants could walk
through it. That seems precisely what they have
been doing in ramping oil prices through the roof
in recent months.
The senate report was
ignored in the media and in the Congress. The
report pointed out that the Commodity Futures
Trading Trading Commission, a financial futures
regulator, had been mandated by Congress to ensure
that prices on the futures market reflect the laws
of supply and demand rather than manipulative
practices or excessive speculation. The US
Commodity Exchange Act (CEA) states:
Excessive speculation in any
commodity under contracts of sale of such
commodity for future delivery ... causing sudden
or unreasonable fluctuations or unwarranted
changes in the price of such commodity, is an
undue and unnecessary burden on interstate
commerce in such commodity.
Further,
the CEA directs the CFTC to establish such trading
limits "as the commission finds are necessary to
diminish, eliminate, or prevent such burden".
Where is the CFTC now that we need such limits? It
seems to have deliberately walked away from its
mandated oversight responsibilities in the world's
most important traded commodity, oil. As that US
Senate report noted:
Until recently, US energy futures
were traded exclusively on regulated exchanges
within the United States, like the NYMEX, which
are subject to extensive oversight by the CFTC,
including ongoing monitoring to detect and
prevent price manipulation or fraud. In recent
years, however, there has been a tremendous
growth in the trading of contracts that look and
are structured just like futures contracts, but
which are traded on unregulated OTC [over the
counter] electronic markets. Because of their
similarity to futures contracts they are often
called "futures look-alikes".
The
only practical difference between futures
look-alike contracts and futures contracts is that
the look-alikes are traded in unregulated markets
whereas futures are traded on regulated exchanges.
The trading of energy commodities by large firms
on OTC electronic exchanges was exempted from CFTC
oversight by a provision inserted at the behest of
Enron and other large energy traders into the
Commodity Futures Modernization Act of 2000 in the
waning hours of the 106th Congress.
The
impact on market oversight has been substantial.
NYMEX traders, for example, are required to keep
records of all trades and report large trades to
the CFTC. These Large Trader Reports, together
with daily trading data providing price and volume
information, are the CFTC's primary tools to gauge
the extent of speculation in the markets and to
detect, prevent and prosecute price manipulation.
CFTC chairman Reuben Jeffrey recently stated: "The
commission's Large Trader information system is
one of the cornerstones of our surveillance
program and enables detection of concentrated and
coordinated positions that might be used by one or
more traders to attempt manipulation."
In
contrast to trades conducted on the NYMEX, traders
on unregulated OTC electronic exchanges are not
required to keep records or file Large Trader
Reports with the CFTC, and these trades are exempt
from routine CFTC oversight. In contrast to trades
conducted on regulated futures exchanges, there is
no limit on the number of contracts a speculator
may hold on an unregulated OTC electronic
exchange, no monitoring of trading by the exchange
itself, and no reporting of the amount of
outstanding contracts ("open interest") at the end
of each day.
Then, apparently to make sure
the way was opened really wide to potential market
oil price manipulation, in January 2006, the
George W Bush administration's CFTC permitted the
ICE, the leading operator of electronic energy
exchanges, to use its trading terminals in the
United States for the trading of US crude oil
futures on the ICE futures exchange in London -
called "ICE Futures".
Previously, the ICE
Futures exchange in London had traded only in
European energy commodities - Brent crude oil and
United Kingdom natural gas. As a United Kingdom
futures market, the ICE Futures exchange is
regulated solely by the UK Financial Services
Authority. In 1999, the London exchange obtained
the CFTC's permission to install computer
terminals in the United States to permit traders
in New York and other US cities to trade European
energy commodities through the ICE exchange.
The CFTC opens the door Then,
in January 2006, ICE Futures in London began
trading a futures contract for WTI crude oil, a
type of crude oil that is produced and delivered
in the United States. ICE Futures also notified
the CFTC that it would be permitting traders in
the United
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