Oil futures – speculation fires increase in prices

Goldman Sachs was one of the founding partners of online commodities and futures marketplace Intercontinental Exchange (ICE). And ICE has been a primary focus of recent congressional investigations; it was named both in the Senate’s Permanent Subcommittee on Investigations’ Staff Report and in the House Committee on Energy & Commerce’s hearing last year. Those investigations looked into the unregulated trading in energy futures, and both concluded that energy prices’ climb to stratospheric heights has been driven by the billions of dollars’ worth of oil and natural gas futures contracts being placed on the ICE-which is not regulated by the Commodities Futures Trading Commission.

Business Week reported that some Wall Street firms were hard-selling to the public stocks that their companies were quietly divesting-and/or pushing questionable stocks for companies in which their affiliated banks had a financial interest. In a nutshell, some individuals with a specific vested interest in a certain financial outcome used the media to enrich themselves and their companies, leaving the public investor holding the bag.

Once that deception was uncovered (after the stock market collapsed), and after the congressional hearings in 2001 proved beyond any doubt that these things had happened, the national media swore that they would never again be taken in by this type of corporate deceit.

The Senate pointed out in its 2006 report that oil reserves (not including the Strategic Petroleum Reserve) were at a 20-year high during the time that report was written; therefore, there was no shortage of oil whatsoever. This seemed to confirm an article in Reuters that quoted a risk manager at Mitsubishi saying “We’ve got a short-term [oil] oversupply problem.” An oil oversupply problem in fall of 2006 seems to be correct.

Then, as now, that certainly isn’t what we were being told. Instead we were being bombarded daily in the media and analysts’ reports with justifications for the high price of oil: The “terrorism premium” on each barrel of oil, the rising demand of China and India, troubles in the Nigerian oil patch, oil pipelines’ being blown up in Iraq, wider war in the Middle East, warnings that the world was on the cusp of Peak Oil, “surging demand” for gasoline in the US, the weak dollar-and so on. Peak oil is described as the world crossing the halfway mark for extracting its oil reserves. It is not maximum production. However, the Senate took a dim view of those excuses, particularly the ones about Peak Oil or diminished capacity for oil production: There are 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.

This suggests that persons invested in the oil futures market are purposely driving even more money into oil to raise the prices even higher, even though the market’s actual supply and demand in no way justifies their claims. On a side note, Enron is named frequently in both investigations as exemplifying this type of energy market manipulation.

And, although both the Senate and the House have already investigated why oil is selling for more than supply and demand dictate.

Commodities have often been the refuge for investors who have lost money on equities or fixed-income investments. Moreover, the commodities rush today is not limited to oil; now we also have runaway food and feed prices. Could it be that all the financial losses on sub-prime mortgages, plus the anticipation that the option ARM mortgages about to reset could be an even bigger problem, combined with the huge losses in securities last year, are why investment money today is flooding into often unregulated commodities, where the demand pricing of the final goods is inelastic?

One may not buy gasoline or even eat today, may probably have to do both, no matter what it costs. Basically, besides enabling the Fed to bail out Wall Street and our banks again, every time you gas up or eat you may be paying investors to cover other financial losses. Investors can’t control their losses on mortgages, securities, or bad loans. But, demonstrably, if not restrained they can drive up the price of goods that can’t get out of buying. Odds are, that’s what’s really been going on.