Page 2 of 2 Oil price mocks fuel realities
By F William Engdahl
consensus that "oil prices will likely soon drop dramatically and the long-term
price increases will be in natural gas".
Just a few days earlier, Lehman Brothers, a Wall Street investment bank, had
said that the current oil price bubble was coming to an end. Michael Waldron,
the bank's chief oil strategist, was quoted in Britain's Daily Telegraph on
April 24 saying, "Oil supply is outpacing demand growth. Inventories have been
building since the beginning of the year."
In the US, stockpiles of oil climbed by almost 12 million barrels in
April according to the May 7 EIA monthly report on inventory, up by nearly 33
million barrels since January. At the same time, MasterCard's May 7 US gasoline
report showed that gas demand has fallen by 5.8%. And refiners are reducing
their refining rates dramatically to adjust to the falling gasoline demand.
They are now running at 85% of capacity, down from 89% a year ago, in a season
when production is normally 95%. The refiners today are clearly trying to draw
down gasoline inventories to bid gasoline prices up. "It's the economy,
stupid," to paraphrase Bill Clinton's infamous 1992 election quip to daddy
Bush. It's called economic recession.
The May 8 report from Oil Movements, a British company that tracks oil
shipments worldwide, shows that oil in transit on the high seas is also quite
strong. Almost every category of shipment is running higher than it was a year
ago. The report notes that, "In the West, a big share of any oil stock building
done this year has happened offshore, out of sight." Some industry insiders say
the global oil industry from the activities and stocks of the Big Four to the
true state of tanker and storage and liftings, is the most secretive industry
in the world with the possible exception of the narcotics trade.
Goldman Sachs again in the middle
The oil price today, unlike 20 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 in Atlanta was founded in part
by Goldman Sachs, which also happens to run the world's most widely used
commodity price index, the GSCI, which is over-weighted to oil prices.
As I noted in my earlier article, ICE was the focus of a recent congressional
investigation. It was named both in the Senate's Permanent Sub-committee on
Investigations' June 27, 2006, Staff Report and in the House Committee on
Energy and Commerce's hearing in December 2007, which looked into unregulated
trading in energy futures.
Both studies concluded that the energy price climb to $128 and beyond is driven
by billions of dollars' worth of oil and natural gas futures contracts being
placed on the ICE. Through a convenient regulation exception granted by the
George W Bush administration in January 2006, the ICE Futures trading of US
energy futures is not regulated by the Commodities Futures Trading Commission
(CFTC), even though the ICE Futures US oil contracts are traded in ICE
affiliates in the US. And at Enron's request, the CFTC exempted the
over-the-counter oil futures trades in 2000.
So it is no surprise to see in a May 6 report from Reuters that Goldman Sachs
announces oil could in fact be on the verge of another "super spike", possibly
taking oil as high as $200 a barrel within the next six to 24 months. That
headline, "$200 a barrel!" became the major news story on oil for the next two
days. How many gullible lemmings followed behind with their money bets?
Arjun Murti, Goldman Sachs' energy strategist, blamed what he called
"blistering" (sic) demand from China and the Middle East, combined with his
assertion that the Middle East is nearing its maximum ability to produce more
oil. "Peak oil" mythology again helps Wall Street. The degree of unfounded hype
reminds one of the self-serving Wall Street hype in 1999-2000 around dot.com
stocks or Enron.
In 2001, just before the dot.com crash in the NASDAQ, some Wall Street firms
were pushing the sale to the gullible public of stocks that their companies
were quietly dumping. Or they were pushing dubious stocks for companies where
their affiliated banks had a financial interest. In short, as later came out in
Congressional investigations, companies with a vested interest in a certain
financial outcome used the media to line their pockets and that of their
companies, leaving the public investor holding the bag.
It would be interesting for Congress to subpoena the records of the futures
positions of Goldman Sachs and a handful of other major energy futures players
to see if they are invested to gain from a further rise in oil to $200, not
forgetting that 16 to one leverage with which a hedge fund or bank can buy oil
futures.
We are hit with an endless series of plausible arguments for the high price of
oil: a "terrorism risk premium", a "blistering" rise in demand of China and
India; unrest in the Nigerian oil region; oil pipelines' blown up in Iraq;
possible war with Iran ... And above all the hype about peak oil. Oil
speculator T Boone Pickens has reportedly raked in a huge profit on oil futures
and argues, conveniently, that the world is on the cusp of "peak oil". So does
the Houston investment banker and friend of Vice President Dick Cheney, Matt
Simmons.
As noted in the June 2006 US Senate report, The Role of Market Speculation in
Rising Oil and Gas Prices, "There's a few hedge fund managers out there who are
masters at knowing how to exploit the peak oil theories and hot buttons of
supply and demand, and by making bold predictions of shocking price
advancements to come they only add more fuel to the bullish fire in a sort of
self-fulfilling prophecy."
Will a Democratic Congress act to change the carefully crafted opaque oil
futures markets in an election year and risk bursting the bubble? On May 12,
the House Energy and Commerce Committee stated it will look at this issue in
June.
F William Engdahl is author of A Century of War: Anglo-American
Oil Politics and the New World Order (PlutoPress), and Seeds of
Destruction: The Hidden Agenda of Genetic Manipulation (Global Research,
available at www.globalresearch.ca). He may be reached at info@engdahl.oilgeopolitics.net.
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