Oil Speculators Cash In on Washington’s Lapse

This article was written with Chris Markowski, the Watchdog on Wall Street. It's part of a series of articles developed under an agreement with thestreet.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.

David Evanson and Chris Markowski

Thestreet.com, Winter, 2012

In 2008, then candidate Obama said gas prices were exorbitant because of failed policies. This week he said they were high because of increasing global demand combined with pockets of unrest.

Herezzs the point to keep in mind: Neither the administration nor the Congress wants clarity on energy prices. The reason for this is simple. They are too indebted to the financial services industry that is capitalizing on the confusion to do anything about it.

Whether this is a sin of omission or commission is too scary to ponder. Izzd like to think itzzs the former, but the gains made by the financial services industry in lobbying sometimes makes me think it could be the latter.

To wit, a 2006 Senate report entitled, “The Role of Market Speculation in Rising Oil and Gas Prices: A Need to Put The Copy Back on the Beat,” which concludes that some 50% of the price of oil at the time was attributable to speculation.

It says: ” . . . speculative purchases of oil futures have added as much as $20-$25 per barrel to the current price of crude oil, thereby pushing up the price of oil from $50 to approximately $70 per barrel.”

The real speculation here is why the Senate was asking the question in the first place. The passage six years earlier of the Commodity Futures Modernization Act of 2000, in an epic victory for financial services lobbyists, gave banks a tremendous but risky opportunity.

Among other things, trading of commodity derivatives in Over-The-Counter markets (i.e., traded directly between two parties, without going through an exchange or other intermediary), enabled banks to escape the regulatory purview of the Securities and Exchange Commission and the Commodity Futures Trading Commission. We all know what followed.

But the effects linger. Historically, speculators made up approximately 30% of oil trading in commodity markets, while producers and end users made up about 70%. Today the roles have been reversed. That means speculation, not supply and demand, are driving oil prices.

The consequences of submitting to the influence of the financial services lobby are compounded by conflicting political agendas. For instance, Nobel prize winning energy secretary Dr. Steven Chu, in 2008, quipped, “Somehow we have to figure out how to boost the price of gasoline to the levels in Europe.” Oi vey . . .

Yes, itzzs confusing. But as I said, that seems to be the point. The more confusion in energy and or commodity markets, the more volatility. The more volatile these markets are, the more profitable they are for banks and brokerages to trade in them. As their profits grow, the less leverage our politicians have in reigning them in through regulation.

So in the end the higher prices we pay at the pump are simply a pernicious tax. As I see it, this tax is funding corporate welfare in the form of higher profits for the financial services industry. And the really slick thing is, it is being collected without ever being officially levied. Very slick indeed.

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