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Sunday, June 15, 2008

BURNING OIL


I don’t like being gamed and I don’t like being lied to. And I don’t like being “served” by a “mainstream” media who seem obsessed with their own navels. George Bush is out to lunch, again and both of our Presidential candidates are in mumble mode, repeating platitudes (so much for Obama’s “new” politics.) All of which means that the best friend the American middle class has in the entire world is the Saudi Arabian Oil Minister, Ali al-Nami, who said publicly that the current price of crude oil is “unjustified” and just that simple statement forced a drop of $1.88 in the price of a barrel of crude on the N.Y. Mercantile Exchange. It’s now at $134.86 a barrel. When a bureaucrat from an autocratic theocratic monarchy is the best friend the citizens of a democracy have, we are well on our way to hell.
Are we running out of oil? According to U.S. government sources, we have burned over 875 billion barrels of oil over the last 75 years. There are 42 gallons in every barrel of oil, so we burn about 9 billion gallons of oil every day in the United States. But there are 1,000 billion barrels of proven and probable reserves still in the ground. No, we are not running out of oil in the near future. It is clearly time to start conserving and moving to other energy sources, but despite what the mainstream media would have you believe, the experts can find no logical explanation for the current price run-up. Even after the 9/11 terrorist attacks in New York oil was selling for just $17.45 a barrel. Michael Lynch, President of Strategic Energy & Economic Research believes that “…at about $80 a barrel the market crossed into the irrational exuberance level…It’s hard to find a rational explanation for the gain of the last six months.” Unless of course, the explanation has nothing to do the true value of oil, but with market gaming. The price of oil has risen 697%, that is six hundred ninety-seven percent, since November 2001, and on June 6, 2008 it hit $139 a barrel. Why?
There is no mystery here. There is a long history of people “gaming” isolated unregulated or under regulated markets. In 1979-80 the Hunt brothers pushed the price of silver from $11 an ounce to $50 an ounce in 5 months by controlling just 100 ounces out of a world supply estimated at more than 400 million ounces. That bubble collapsed by April of 1980 but the same thing is happening now with essential commodities, including oil and food, because we are talking about a tiny market, relative to the global economy: the futures market. The commodity futures can be manipulated by buying on “margin”, which means that with access to a few million dollars, usually in unregulated “hedge funds,” speculators can leverage hundreds of billions of dollars in profit for themselves with the connivance of bureaucrats blinded by ideology.
You might call it the revenge of the unregulated economy, or maybe “Enron, risen from the grave”, because that is the most recent philosophical base of the current market mess. Wikipedia most succinctly describes the process in the California electricity market in 2000, in which Enron was a central player; “Deregulating the producers …did not encourage new producers to create more power and drive down prices. Instead,…The producers used moments of spike energy production to inflate the price of energy… Manipulation strategies were known to energy traders under names such as "Fat Boy", "Death Star”, "Forney Perpetual Loop", "Ricochet", "Ping Pong", "Black Widow", "Big Foot", "Red Congo", "Cong Catcher" and "Get Shorty"…. On December 15, 2000…California was paying a wholesale price. .of over $1400 per megawatt, compared to $45 per megawatt average one year earlier.” In 2002 S. David Freeman, who ran California’s Power Authority during the so called energy crises, could have been describing the current (2008) oil price spikes when he testified before a Senate Subcommittee; “…a market approach for electricity (or commodity trading) is inherently gameable….Never again can we allow private interest to create artificial or even real shortages and to be in control.”
"Never again" under Bush and the true believers in the nobility of market managers proved a horribly short time. Der Spiegel, the German news magazine, describes the current futures market this way, “…the transactions concluded in this sector no longer have anything to do with real goods…They trade in pieces of information that mean nothing until they are in possession of one of them….When a pipeline bursts in Canada, “the price immediately jumps by $4”, says Fadel Gheit, an oil analyst with Oppenheimer in New York with 20 years experience in the industry. Gheit, also an engineer, knows how pipelines are repaired. “This isn’t heart surgery. It’s a plumber’s job, child’s play, finished in three days,” he says. “The traders use every excuse in the book to drive up prices”.” Sound familiar?
Because they are risking so little (and in any case it is OPM, Other People’s Money) they take huge risks, driving prices in huge swings up and then down. And it isn’t just oil. Again, from Der Spiegal: “In Chicago, the home of the world’s largest commodities futures exchange, the volume of futures being traded is already 30 times as high as the annual grain production in the United States…”Real Trading”, says Hubert Gabrisch of the Institute for Economic Research…has “become the exception on the exchanges”. Prices are now determined by speculators, financial jugglers with no interest whatsoever in having any contact with or physically delivering the vast amounts of grain they own.”
Hedge fund manager, Micheal Masters, told congress last month that speculators had purchased 1.1 billion barrels of oil futures, 8 times the amount in the national strategic oil reserve. They certainly never expect to actually deliver that oil to a customer, or even get within smelling distance of it. And speculators have now bought enough corn futures to fuel the entire U.S. ethanol program for a year. The closest these traders ever get to corn is if it shows up on their dinner plate. Trading House Morgan Stanley now owns agricultural land in the Ukraine. A New York fund owns 2,700 acres of farmland in Britain. And the British Emergent Asset Management company is buying African farms south of the Sahara Desert. What the hell are these brokers going to do with that property? This is not trading commodity futures, it is fantasy trading like a fantasy baseball or a fantasy football league. And it desperately needs to be brought under control
How did we get in this mess? It was easy. Step one was the historically low interest rates, which meant that cash was plentiful and at the same time you couldn’t make much money lending money. That drove investors to look elsewhere for large profits, at places they had never bothered to look at before. Couple this with the “free market” fanatics, and the “deregulation” craze, and a “bubble” was inevitable. In fact, we have now suffered through a dozen bubbles, each one bigger than the last and all fueled by the deregulation craze. And investment guru George Soros believes we are approaching a “Super Bubble” that could pop and throw us into another worldwide “Great Depression”. And that is why the Saudi oil minister is our new best friend. A world wide depression might mean a revolution in his nation: and ours.
We need to return to a real market economy. We need to do that while we still have a choice, before a complete economic collapse forces us to do it.
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