Les Leopold: How Wall Street Drives Up Gas Prices

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By Les Leopold, the author of The Looting of America: How Wall Street’s Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It. Cross posted from Alternet

Gasoline prices have been falling in recent weeks, but they’re still close to their five-year high after climbing steeply for three years. For every penny increase at the pump, $1.4 billion per year leaves our collective pockets, creating a drag on the sluggish “recovery.” Where does it go and what caused the price explosion at the pump?

It’s a common belief that oil prices are set on the world market by supply and demand. Less supply and/or more demand causes prices to rise. Oil is getting harder to find; OPEC is holding back supply; China and India are guzzling it up; Iran is threatening to blow it up. And regulations are getting in the way of drill, baby, drill — end of story.

But this fixation on blind market forces ignores the fact that Wall Street is financializing the commodities markets – especially oil – as it seeks new ways to pick our pockets. The same greedy swindlers who puffed up the housing bubble and then milked it dry are now hard at work doing the same with gasoline.

What is financialization and why is it coming to the oil industry?

Here’s a chilling definition provided by economist Thomas I. Palley (PDF):

Financialization is a process whereby financial markets, financial institutions, and financial elites gain greater influence over economic policy and economic outcomes…..Its principal impacts are to (1) elevate the significance of the financial sector relative to the real sector, (2) transfer income from the real sector to the financial sector, and (3) increase income inequality and contribute to wage stagnation. 

In short, we’re talking about the spread and growing supremacy of financial gambling – the ability to bet on the prices of goods produced in the real economy without actually owning those goods.

The vital activities of manufacturing, resource extraction and agriculture are turned into financial instruments that can be rapidly bought and sold. More to the point, financialization allows financial gamblers to extract profits from the real economy to enrich themselves without producing any real economic value for our economy.

When markets are financialized, they offer a myriad of ways for Wall Street firms to bend or break laws to manipulate markets and haul in enormous profits. In effect, financialization extracts a hidden tax from the real economy which is then passed onto us in the form of higher prices, economic hardship and then government bailouts when it all comes crashing down.

The oil markets have become just another profitable Wall Street casino. Why? Because, as the infamous outlaw Willie Sutton said, “That’s where the money is.” Oil markets as well as other commodity markets require a certain number of speculators. Oil producers and end users go to these markets in order to lock in prices for the products they use or sell. From refiners to shippers to airlines, oil markets provide a way to obtain price certainty for a specified period of time. To make these markets function, speculators are needed to take the other side of those trades. For more than a century about 30 percent of these commodity markets involved speculators and 70 percent of the participants in terms of volume were real producers, distributors and users. That’s what a healthy commodities market looks like.

But once financialization metastasized, the proportions flipped. Now 70 percent of the action comes from speculators, while only 30 percent comes from those who really produce, distribute and use the actual commodities. The casino has taken over.

This speculative invasion is why gasoline prices are climbing rapidly. The only question remaining is how much of the price rise is due to excess speculation. Here’s what the experts say:

  • The St. Louis Federal Reserve (not exactly a Marxist institution) claims that 15 percent of the rise in gasoline prices is due to Wall Street speculation (PDF).

  • A report from the House Committee on Government Oversight claims that up to 30 percent of the rise may be due to speculators.

  • Even experts at Goldman Sachs, of all places, say that “excessive speculation is causing oil prices to spike by up to 40%.”

  • And Saudi Arabia, ”the largest exporter of oil in the world, told the Bush administration back in 2008, during the last major spike in oil prices, that speculation was responsible for about $40 of a barrel of oil.”

This flip in the balance of real economic activity and speculation is precisely what John Maynard Keynes warned us about more than 75 years ago:

"Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism…."

Who are the speculators?

Senator Bernie Sanders released classified documents revealing the names of the largest speculators in the oil markets as of 2008.

A look at the top 20 speculators reveals that only five are actually involved in producing, shipping, refining and consuming oil (Vitol, CMA, ENA, Semgroup and Emirates Oil). The other 15 are banks and investment houses – a virtual who’s who of Wall Street firms that puffed up the housing bubble and took down the economy. Goldman Sachs, Morgan Stanley, JP Morgan Chase, Merrill Lynch, Citigroup — they all make the list.

A tale of two casinos

It’s stunning to compare the similarities between the housing bubble and the rise in oil prices. Just take a look at the two charts below. The first shows the price of a barrel of oil after eliminating the impact of inflation. You can see the price spike in the 1970s during the Iranian oil boycott, and then in the 1990s during the Persian Gulf War. Clearly, those significant geopolitical events disrupted supplies and had a real impact on the price of oil.

But look what happened when the Wall Street big boys jumped into the oil speculative business right around 2002-’03. The price of oil went bonkers. The gyrations were far more extreme than any of the previous geopolitical events. There is no rational supply-and-demand explanation that accounts for that dramatic rise. Sure, after the economy crashed in 2008 prices declined. That makes sense. But up again goes the price of oil even though we’re facing nothing like the supply and demand shifts caused by oil boycotts and wars. Then again, maybe it does indicate a new war – Wall Street versus the rest of us.

Now take a look at the housing bubble graph – similar shape, similar timing. And that’s no coincidence. When Wall Street turns a market into an enormous casino, prices skyrocket and the economy is threatened. Wall Street did it to housing and now they’re doing it again to commodities — especially oil.

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Wall Street oil speculators kill jobs

When Wall Street jacks up gasoline prices through its speculative activities, it has two job-killing impacts. First, it sucks money out of our pockets to pay for gasoline, which in turn means we have less money to spend on other goods and services in the real economy. It’s the equivalent of an anti-stimulus tax. As gasoline prices go up, economic demand falters and workers in the real economy are laid off.

The second impact is more complex but just as real to unemployed oil workers on the East Coast where several refineries in the Philadelphia area are being shut down even though the price of refined gasoline is rising.

Here’s where it gets tricky. The East Coast gets its oil primarily from the North Sea. That’s called Brent oil. The rest of the country gets most of its oil from the Gulf Coast. That’s called West Texas. The two kinds of oil are very similar in content and traditionally were similarly priced. Not any more.

As the chart below illustrates, a gap has emerged so that Brent oil is now significantly more expensive. This means that the oil coming into East Coast refineries is more costly to refine. But the increased cost can’t be passed on at the pump because the national prices are mostly set by the lower cost West Texas oil (and from European refineries that are dumping gasoline in the U.S. as Europe switches more and more to diesel). As a result, East Coast refinery profits are squeezed, which in turn leads to the shutdowns.

But what accounts for the split between the two prices of oil? Some experts say Brent oil is becoming more expensive because other oil supplies coming into Europe from the Middle East are more vulnerable and uncertain due to the Iranian situation and the Arab Spring. Maybe so. But speculation also is at work. Because oil speculation regulations are more lax in London, it is likely that Brent oil is the raw material for a more profitable casino. As Wall Street money pours in, up go the prices…and down go the refineries and thousands of refinery workers.

But wait, isn’t Wall Street helping the environment by driving up gasoline prices?

Without question the rise in gasoline prices moves the nation toward more fuel-efficient cars, which in turn will reduce greenhouse gas pollution. But relying on Wall Street to cause this dynamic is ridiculous, foolish and grossly unfair. First, because Wall Street speculators not only drive up prices they create price instability – rising prices followed by rapid crashes. If a recession follows, gas prices will crash and the incentive to purchase fuel-efficient cars will disappear. Second, rising gas prices without offsetting credits for low-income people are very regressive – meaning lower-income people pay a higher share of their income on fuel costs.

But more galling is the fact that Wall Street speculators are pocketing what amounts to a gas tax as if they were the duly-elected government of the United States (maybe they are the government, but not duly-elected).

If we want to tax carbon for the sake of the environment (and we should), then the government should do so and collect the revenues, not Wall Street. And if we think that Wall Street’s nefarious way is better than nothing at all, than heaven help us.

How do we rein in the speculation?

President Obama recently called for $58 million in order to put “more cops on the beat” at the regulatory agencies that police the commodities markets. Supposedly these extra cops would be able to prosecute more cases of price manipulation and other blatant violations of the rules and regulations that govern commodity trading.

This effort, while laudable, doesn’t go nearly far enough. The best way to check speculation may be through a financial transaction tax that makes it less profitable to speculate in commodity markets. A relatively small tax on all financial transactions would likely reduce the number of bogus speculators. That’s the only message they understand. Enforcement of weak rules matters little to those who spend all their waking hours playing and dreaming up new financial casino games. The only way forward is to take away their chips.

Unfortunately, the Obama administration opposes any and all financial taxes for fear they will upset financial markets. Well, this market is already upset by financial greed and corruption. Hopefully, the administration will learn before it’s too late that the American people are sick and tired of being fleeced by Wall Street.

In the meantime, next time you fill up your tank, remind yourself that something like $10 to $25 is going right from your pocket to Wall Street. Maybe that will get us to join the fight for a financial transaction tax. It’s long overdue.    


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  1. Deus-DJ

    Les Leopold: the older model that economists used rather than the supply/demand approach was the surplus approach…and the surplus approach best illustrates how those with the surplus (wall street) are redirecting it not towards the social product and wages, but towards extracting it from whatever is left from whatever remaining savings or assets are left in the economy (I call the financial industry, from within teh surplus approach, a bottleneck on growth and development). It is literally destroying economies worldwide.

  2. F. Beard

    The other 15 are banks and investment houses – a virtual who’s who of Wall Street firms that puffed up the housing bubble and took down the economy. Goldman Sachs, Morgan Stanley, JP Morgan Chase, Merrill Lynch, Citigroup — they all make the list. Les Leopold

    And how much of the speculation is done with credit including cheap loans from the Fed? How much of the population’s own stolen purchasing power is used not to provide jobs and better good and services but to drive up their living costs instead?

    It all goes back to the banks.

    Who could know that “Thou shalt not steal” even applies to so-called “credit”?

    1. Deus-DJ

      they aren’t using their own funds (or borrowed funds). Rather they make the money through fee income, charging investors for being allowed to invest via their funds. There has been talk of hedge funds and maybe some investment banks buying up large amounts of farmland and oil tankers (or doing structures like what Chris cook has outlined), but all of this is hidden from the public. China has been buying up land as well.

        1. chitown2020

          The Federal Government has hijacked everything under the guise of money lending but, they lent nothing of value, they lent credit. Thank Tricky Dicky Nixon for letting the U.N. hold our land in fee simple in exchange for credit. Like I have been saying, this is a GLOBAL CREDIT SCAM and they lent NO MONEY…They are scammers. Everything they have done and are doing has been and is a fraud to defraud us. The credit the WORLD BANK/IMF created was off of the backs of our labor by our birth certicates that they buy sell and trade on Wall Street. We lent them our money at the ORIGINATION via the U.S. TREASURY DEPT. of every credit transaction with our signatures. Hence, the ORIGINATION
          looted everything under the guise of money lending…and they are the borrowers.

  3. Bam_Man

    Given the circumstances, I think that oil is actually quite cheap. With every Central Bank on earth printing “money” like mad, I think it is quite amazing that the oil producing states are still accepting these incerasingly worthless pieces of paper as payment for their precious, finite resources. But rest assured, there will come a day when they no longer do. Eleven carrier battle groups or not.

    1. mac

      Even IF the Speculators declare that they have not the influence to drive up the prices, let us stop them dead and learn the truth.
      Truth is a great idea!

  4. Hugh

    I for one have been making similar points for something like 5 years now. There are a number of ways to wring excess speculation out of the oil markets.

    Reverse the 1993 CFTC rule that let non-commercial speculators, like Goldman and Morgan Stanley, into the oil markets.

    Increase margins on futures contracts from 5-7% to 25-30%.

    Position limits.

    Close out the OTC markets

    1. bluntobj

      Hugh has the correct solution. The CFTC prevented this until the last dregs of protection were swept away in 2003 (or 2004, i forget).

      Hedging on commodities was originally for producers/consumers of the products.

      Finding a method for elimination of the use of leverage in derivative transactions would also be useful. Speculation with owned capital is one thing, but speculation with borrowed money is far worse.

      1. F. Beard

        but speculation with borrowed money is far worse. bluntobj

        Especially with money that is borrowed into existence aka “credit”.

        1. chitown2020

          Speculation is just a nice word for gambling. Like robo-signing is a nice word for fraud.

      2. nonclassical

        Let’s not forget “borrowed $$$”, leveraged against (collateral) “securitized mortgages” or MBS…phoney “securities”…because THIS is what Wall $treet WANTED “securities” for…

        1. chitown2020

          If you are familiar with the living lies website. Attorney, Neil Garfield wrote a good piece about how Securitization is illegal. It’s a scam.

          1. nonclassical

            thanks, Chitown,

            but I don’t see this info on “securitization” on the site?

          2. chitown2020

            Neoclassical…I printed out the article. I will look for it and post the link when I find it. I copy everything so it might take me a while but I will find it. They are blocking links and attemoting to hide tons of info now. Even the Coast Guard gun boat story my local media reported yesterday……you cant find the story…! Looks like they are ramping up their war on the whistle blowers. Stuff is even disappearing from you tube. I read they are shutting down accounts for no apparent reason.

          3. Yves Smith Post author

            With all due respect, Garfield is not trustworthy and foreclosure defense attorneys see him as detrimental to their efforts to expose chain of title abuses. He makes hysterical, unsupported assertions. And his investigation service is a ripoff. He’s taking advantage of desperate homeowners.

    2. Literary Critic

      That of course would be the simple and easy solution.

      But it would get nixed by howls over the fact that these people provide important liquidity to markets, and we shouldn’t mess with free market price discovery! Unless they short of course.

    1. sunny129

      Professionals have HFT, dark pools and Quantitative Computer programming aimed at the market. Trading in futures belongs mainly to professionals.

      ETF is a stool for the ordinary investor. One has to know the ‘limitations’ just like any other tool. Yes, they have drawbacks like counter party risks. But it is one of the tool in managing risk, nothing less or more.

  5. sunny129

    I have been reading NC over more than couple years. NC is doing yeoman service to citizens telling story behind the story.

    But afterwhile I see the same ‘intractable’issues rehashed again and again with no pragmatic solution in sight. May be the same story with different angle.

    When I see the titles lined up under NC, I feel tell me ‘something I don’t know already’ or tell me something new or some one dare enough to expose the frauds going on to the MSM to create wide awareness.

    May be I am becoming too cynical. Americans are highly polarized and divided along the narrow issues and are unable to grasp the big picture!

    As Judge Rakoff recently said’ The enemies of truth are HYPOCRISY and SECRECY. They are rampant all over, in all aspects of life.

    1. nonclassical

      ..seems to me NC is sometimes linking similar patterns in ever evolving spirals..
      these patterns experience subtle changes. I am constantly learning from NC,
      and get a large portion of news (links) from NC daily. U.S. news sources are so pathetic (lived in, and intend to retire Europe) Americans miss more than they perceive..

  6. J Sterling

    The purpose of a gas tax is to discourage actors from pulling fossil fuel out of the ground. The bonanza that is massive gas profits *encourages* the actors to pull more carbon out of the ground.

  7. Paul Jurczak

    Agree with the main premise, but “Iran is threatening to blow it up” triggered a causality alert. “All options are on the table” + “under no circumstances would Israel be able to tolerate nuclear weapons in Iranian possession” -> “Iran is threatening to blow it up” would be the tail of causality chain.

  8. Pat

    I see a different correlation than oil to ETFs, housing or general riverboat gambling.
    If you remember, the price of oil skyrocketed just as the stock market was collapsing (Dow from 14000 to 7800), in 2007-2008. This suggests that the big brokerage houses (GS, JPM, et al.) moved into oil futures trading in order to offset or replace stock trading profits. (No doubt they saw that they could squeeze shorts and suppliers who absolutely needed oil.) After the squeeze the price plummeted and the big brokers walked away with their money. Since the first squeeze was so successful, they have repeated the process, aided by the various factors mentioned in the article.
    The government did not object to the price spike because they wanted and needed to help the big brokers. And also because our present government is spineless. Perhaps the government agreed to a second spike on condition that the big brokers drive the stock market back into nosebleed territory again using their fancy “computer buy programs”.

    There may be another reason why the government has so meekly acquiesced to this outrageous price manipulation. The government has been printing money like crazy since the 2008 crash. High oil prices “soaks up” all these extra dollars, and the Saudis, the main beneficiaries of the speculation, are forced to reinvest these dollars into the stock market or US Treasury Bonds. So if you follow the money, it goes from: Consumer, to big brokers and Saudis, to buying bonds and propping up the stock market, which allows the government to keep going and increases consumer confidence. Voila.

    On similar lines, see this story about threats to the petrodollar, “So Long, US Dollar. The Media Won’t Touch This Story About The End Of The US Dollar.”

  9. Conscience of a Conservative

    Susan, great many accusations, and quoting of sources to back that up, but I don’t see a case of proving based on causation. I’d counter that we need speculators to take the other side of those hedging.

    That said, I do think that there is basis to limit positions so that nobody controls the market and can do anyhing remotely similar to a short squeeze.

    1. Hugh

      A) What really do non-commercials need to hedge against in oil markets?

      B) Non-commercial speculators can jack up the price buying and selling among themselves, then dump the higher cost contracts on the commercial users, and net out, settle cash, or flip their remaining contracts.

      1. Anonymous Jones

        Regarding B, of course they can. But for how long?

        I stand in awe of your omniscience. You clearly identified all of this years ago, probably right out of the womb. Or was it when you were still in utero? Pray tell. I have a hard time keeping up with the timeline of your omniscience. When did your computer like brain become self aware? I know you tell us very other day, but my brain is frail, and I can’t keep up. Please remind me.

        It’s amazing with your omniscience that you haven’t realized that it’s your confidence that makes me skeptical. Why do you think that might be? Is it because I’ve never met anyone with a brain as powerful as yours? Or is it because you’re a completely overconfident, delusional blowhard with nothing but bombast? Hmmmm….let me think about that one.

        You might even be right. It doesn’t change the fact that you are delusional and incontrovertibly wrong about your confidence, but seriously, keep embarrassing yourself more every freaking day by telling us how obvious you omniscience is and how you figured ou everything years ago. Please. We all enjoy it. More is always better.

        1. Anonymous Jones

          Damn ipad. I hate apple.

          “every” instead of “very” and “out” instead of “ou”.

          And yes, I’m sure you have more problems with my comment than the typos. Big whoop…reality dictates you will have your own opinion…it still stinks. Sorry.

      2. nonclassical

        Geisst’s book, “Wall $treet-A History” defines investment bankers selling shares back and forth to one another, price rising at each sale, as far back as 1880’s, to DRIVE market prices…collusion is all it takes.

  10. Defiant

    Conviniently misses the printing by the fed, pushed by Obama’s bailout policies. The article is simply a lie and leaves out the core facts. The fiat system is responsible for the tech bubble, housing bubble, ltcm, oil bubble, etc, etc.

    Create money or credit and it might just flow somewhere.

    1. Conscience of a Conservative

      Bingo. Fed lowers rates and tells people you aint’ gonna get a return investing in treasuries , CD’S or safe fixed income, and voilla money leaves and goes to stocks, ETF’s and commodities, anything to earn a return. Basically the Fed controls the price of money and creates more problems than it often cures. Did we suddenly create jobs by making gas prices go up? I hear Fisker opened up its plant in Europe and the solar companies are all bust.

    2. F. Beard

      The fiat system Defiant

      Fiat is the ONLY ethical money form for government debts (taxes and fees).

      Unethical are you?

    3. shtove

      Yes, I was hoping the article would deal with monetary stimulus.

      I have yet to read a convincing piece on the follow-through effect of QE on commodity prices. It seems to be a given by certain respected commentators – I don’t doubt that effect, but would like to see a step-by-step analysis of how it happens.

      1. TiPs

        i presented a paper on this recently. No rigorous analysis yet, but some casual empiricism. When QE2 was announced in 11/10 you can see the impact on investor expectations vai the USO etf and GSCI index. The GSCI increased by 25% from Nov-10 to April-11, and the price of oil (wti) increased by 30%. These investor driven price increases took about 2 months to impact the cpi, then another 2 months to impact core cpi. I argued that financialization of the commodity markets has created a direct transmission from monetary policy to prices through expectations. The bubble burst in May-11.
        It’s not a simple case of speculators prividing liquidity. Investors drive prices, creating greater volatility over the short term, and consumers pay for it.

    4. diptherio

      It is not the fiat system per se that is the problem, but that the fiat power is used for the benefit of bankers and the financial sector generally, rather than for the benefit of all citizens. If QE meant we all got a check from the Fed, it wouldn’t be a big deal. Unfortunately, they give it to bankers who already have too much and so they pass it along to the speculators and hedge funds, who use it to pump up bubbles and pay themselves huge bonuses.

      If the fiat currency is generated and disbursed in an equitable way (i.e. equal access to all people, not debt-created) then there is no ethical problem for the system. I don’t think there would be the economic problems we see with the current in-equitable fiat system either. If QE were distributed equally to all citizens you likely wouldn’t see the creation of speculative bubbles as way too much money in the hands of just a few inevitabely looks for someplace to go.

      If QE were done equitably, the new money wouldn’t go looking for interest bearing opportunities, it would go to paying for the necessities of life. The fiat currency system is unlikely to disappear, the only question is, will we ever figure out how to use it for the good of everyone rather than just for the good of a few.

  11. wunsacon

    Not to take away anything from the article and comments. But, it seems to me that financialization increases commodity prices “unduly” only when financiers have more money than the other market participants, the producers and consumers. The financiers have that money because plutocratic low-taxation policies and Fed giveaways gave it to them (the people on Wall Street) instead of giving it to the producers and consumers (on Main Street) via bailouts of the kind F. Beard and I keep pining for (and which Sheila Bair recently attacked indirectly via reductio ad absurdum). The way to fix the problem of “financiers with too much money” is to take the money back.

    Since Robomney plans to maintain low taxes on our plutocrats, real non-industrial commodity prices will likely continue creeping upwards. (Well, at least, that’s what I expect.)

  12. Marko

    There’s a greater danger than that of increasing the prices we pay at the pump. As Palley says in the quoted piece :

    “Financialization is a process whereby financial markets, financial institutions, and financial elites gain greater influence over economic policy and economic outcomes…”

    With control of vital inputs like oil , metals , and ag commodities , the finance sector can dial up or dial down economic activity and the pain felt by American consumers , at will. The first rule of elections is ” It’s the economy , stupid ! ” , so a handful of big financiers could literally steer the result in their favored direction in a close race.

    Similarly , any time legislation is proposed that they find objectionable , they can predict adverse economic effects if enacted , and then generate those effects as it nears passage. Given the spinelessness of our legislators , that would almost guarantee a retreat or severe weakening of the legislation.

    With enough tools at their disposal , finance may no longer need to bribe legislators with campaign cash. Instead they could simply threaten to raise unemployment in a particular state or district.

    Max Keiser is right – the main terrorist threats this country faces are the bankers.

  13. BJ

    I think that might have been a wee bit more complex than it needed to be.

    Any time you set up a market such that there are large, short-term gains, and also allow anyone to enter the market in such a manner that they face no realized risk (like in the mortgage industry, most retailers were selling off their paper within 30 days of writing it), this is gonna happen…every time…bar none.

    All that stuff is cute and everything, and all the names are super nifty, but this is econ 101.

    In fact, didn’t this stuff used to be illegal…like right after the last depression the US had?

  14. robert157

    High gasoline prices destroy the banks’ real estate holdings, and just about any non-refined product-related investment the banks may have. So if they are singlehandedly driving up gas prices, that wouldn’t seem to be very smart.

  15. robert157

    How come they can’t re-blow the housing bubble no matter how hard they try but the oil market is completely manipulated by banks? The author brought up the housing market to bolster his argument. It does not.

    1. wunsacon

      I, for one, believe the housing market bubble has been partially reblown. Rather than dropping another 20% from ’09-10 minimum, it seems to be up 15% off its low — with only McJob growth to support it.

      1. backwardsevolution

        “I, for one, believe the housing market bubble has been partially reblown. Rather than dropping another 20% from ’09-10 minimum, it seems to be up 15% off its low — with only McJob growth to support it.”

        The speculators that raced in and bought after the crash are now underwater. They’ve got to wait until a new batch of suckers comes in, and then it will drop again.

        It’s a controlled dump.

    2. nonclassical

      ..actually, during 30’s depression era, banks sold off foreclosed “property” for pennies…but this time they are keeping foreclosed properties often…which they then rent. Not holding title-deed, this is also conducive. Foreclosed properties
      which are “sold” are “held” by banks, title-deed to be determined in some other future..

    3. backwardsevolution

      “How come they can’t re-blow the housing bubble no matter how hard they try but the oil market is completely manipulated by banks? The author brought up the housing market to bolster his argument. It does not.”

      It most certainly does bolster his argument. Wall Street sociopathed the hell out of the housing industry: financialization, innovation, deregulation, faulty documentation, fraudulent origination, securitization, mark to model manipulation.

      They held up their hands and said, “We didn’t know,” and ran from housing to commodities: speculation and starvation is their game now.

      Sociopaths are in the house and you’re on the dinner menu!

      1. robert157

        That’s an interesting take, but I think you want to go back and check the timing on that. Most serious observers saw the spike in energy prices burst the housing bubble; they did not see the bursting housing bubble ignite an energy spike.

  16. robert157

    Here’s another simple question.

    Why haven’t oil producers been able to increase global oil production significantly in the past five years, when they have had every incentive to do so, as prices have doubled?

    1. mac

      There is a supply of oil available to fill all needs. It is expensive to store, the earth is a good place to store it.

      1. robert157

        A supply of oil to fill all needs… Sure, but at what price. If my need is $2/gal. gas then it’s not filling my needs. That’s what we see here in the US — rationing of oil supply by price. We are finding out the difference between wants and needs.

        In any case, producers’ holding their supplies in the ground is not speculation by the banks.

        1. nonclassical


          circa july, 2004, Gretchen Morgenson, NY Times showed “investment banks” owning nearly 50% of total world oil futures. Goldman held most, at 13.8%.
          Lehman, Morgan, owned 7-9% each…and so on. They were selling “futures” back and forth to one another, colluding, to raise prices.

          In august 2004, Goldman sold off 1/3 of their futures…everyone who had been playing blinked…but Goldman sought to put them at ease, stating they would be buying back in, in blended or biodiesel. However, the next month they sold off another 1/3…which panicked the market, and all sold off…just in time for bushit November 2004 election cycle-oil went from $4.00 per gallon, to $2.00.

      1. wunsacon

        Also, the NG industry en masse discovered the wonders of pumping toxic waste into the ground and turning up profits.

        But, as Matthew Simmons said: newer drilling techniques accelerate depletion, like slurping on a whole bunch of straws in your milkshake at the same time.

        1. robert157

          Unfortunately they are not pumping toxic waste into the ground. That would be something. They are pumping clean fresh water into the ground, combined with their myriad fracking chemicals and radioactive tracer elements.

          They are pumping toxic waste out of the ground, however, as each load of used fracking fluid must contain hundreds of tons of sediment, in addition to the aforementioned chemicals.

          The whole issue of disclosure of fracking chemicals is a bit of a red herring. The real question is what is coming out of the wells, and what are they doing with it.

  17. mmckinl

    Hey Les Leopold! …. It is called ” Peak Oil ” …

    Total farce of an article … Prices clear every month … for every winner there is a loser in that market … And Brent is more expensive than West Texas Crude because West Texas crude goes to Cushing Oklahoma where it is bottlenecked because of all the new nat gas liquids and heavy crude from the Bakken in the Dakotas and no way out.

    Why is oil so high? Because the price is based on the last or marginal barrel of oil. That new oil that is being developed is costing over $90 a barrel. Leopold needs to get his facts straight. The Cheap Oil is Gone, there is only expensive oil to be drilled from here on out. We are at peak oil. We have been on a production plateau for “conventional oil ” since 2006.

    Marginal oil production costs are heading towards $100/barrel

    Economists View

    “It is sometimes suggested that academics have failed to adequately address the issue of speculation in oil markets and that more research is needed to establish what seems obvious to many policymakers. This is not the case. Rather, extensive research has produced a near-consensus among academic experts that speculation has not been a key driver of recent oil price fluctuations.”


    Neither Paul Krugman nor James Hamilton see ,amipulation of oil priuces on a large scale …

    It’s called Peak Oil, and I suggest everybody get up to speed on the topic because it is going to change the world quickly and not for the better …

  18. JB

    Yes, too much ‘free money’ being printed by fed and creating bubbles of every sort. yes, price increase due to speculation fueled by the bubbles. Yes, peak oil, and demand by china and india– china has more cars than the US now. We are asleep at the switch. And yes, expensive marginal cost to produce the ‘new’ tight rock shales … at least $70/ bbl. The US only produces 3% of global oil, and we still, in an anaemic economy, are using 19 million barrels PER DAY. The entitlement mentality that americans or anyone in the world ‘deserve’ low cost fossil fuels and a convenient lifestyle that the wonderful energy dense substance called oil proffers is gauling. When Gingrich disingemuously promised gas at the pump at $2.50, I laughed out loud. I fear six generations of oil dependency has made us remarkably uncreative, and we are poised to be shellacked. How doo we produce our food, with the huge corporate agribiz? Any oil in that process, from fuleing equipment to fertilizers and herb/pesticides? Our empire-protecting military forays ARE all about oil. Look at nearly any skirmish — oil is almost always within a stone’s throw. The unfunded cost of the military, not embeded in oil cost directly, is another looming issue: can you imagine the cost of the dependent veteran contingent coming home and needing care and feeding post iraniraqafghanipakistan wars? The sooner the price goes sky high and we get substitution going, or the sooner we get the oil gone, the better. Prepare for some significant disruptions in the core of your life, and to see a lot of very tragic events all over the world–maybe in tyour most dear circles. Happy happy from the oil patch

  19. Bill

    Please consider: at least 33% of the world’s oil is produced by countries that need the price of oil to stay above $90 to $100 to fund fiscal spending. That’s OPEC and Russia and a few other countries. There are probably more. IMO, many producing governments most definitely have an incentive to keep oil prices high.

    And what about natural gas? I don’t see Mike Masters complaining about the low price of natty gas. Perhaps that’s because the airline stocks he bot are not powered by natural gas? Hmmmm.

    Is gas systematically offered by the banks to the same extent that crude is bid by the same jokers? Why stop there. Is there a systematic bid for equities, too? I’d argue that the systematic bid for equities dwarfs that for energy products.

    I do believe a small percentage of *total* retail and instutional investment money has made its way into the crude complex via the various commodity indices. But let’s remember that there’s a buyer for every seller out there: the guys @ J. Aron are not long-only.

    So every contract that trades in the energy markets has both a long and short side. I think it’s disingenuous to assume that the banks are keeping prices high via their trading. Yes, bankers want to maximize fee rev by keeping AUM in energy funds as high as possible. But it is crazy to assume that traders at those same firms would sacrifice their trading PnL in exchange for trying to keep energy prices and AUM high. The traders want to get the price right, that’s all. They don’t care if it goes up or down, they just want to get the price right.

    The energy markets are some of the most efficient markets in the world. If there’s a “sytematic” bid for energy, let’s look at the Fed and its policies to drive money into real assets, as well as the incentive many producing countries have to limit supply. Supply and demand always win, just look at natty gas.

    Now, a some side comments for you to consider from one of the best trader’s on the planet, Ed Seykota. To be fair, though, I have no idea how he feels about banks trading the energy markets, though if traders at banks increase liquidity via speculation, he’s probably okay with that:

    “You look at an overall homeostatic system involving the price, if you speed up the process [to] stabilize the system, it will get the price there faster, then the producers start to produce more and the consumers start to consume less earlier, so the system doesn’t get as far out of balance because there are speculators there.

    “If there weren’t any speculators, what would tend to happen is we would run out of stuff, and all of a sudden there wouldn’t be any and the price would go from 50 to 50,000 over night, and then there wouldn’t be any work, no jobs, production would dry up a huge amount, then there would be a big crop [and] no one would use it. Then, five years later they would build another bakery and all this kind of stuff. So, the speculator getting the price up a whole season earlier stabilizes the economy despite what they say about speculators destabilizing and being villians; speculators stabilize the economy and set the price where it is supposed to be.

    “Alternative ways of steadying the price are by a government official deciding what a good price should be, based on what his friends are telling him. That’s basically a destabilizing way to do it. The way that’s the most stable that anybody has been able to come up with is we have speculators. As long as there’s a need for it and there’s a need in the overall economy the benefit of it is it tends to stabilize the economy, and set the price and make sure that all the people that want it are getting it, and all the people that want to produce it are employed. It kind of matches everybody up and that’s a very important function and it pays well to have that job as a speculator.

    “There are two parts, one is knowing the value — that’s the fundamentalist; the other is getting the price there quick. Getting the price there quick is the job of the trend-follower. Stabilizing, getting the price there. There is a reason why, there’s a justification, why we exist, why it goes on forever, far as I’m able to see and as far back in history there has always been big moves, and the patters are about the same.”

    I think Seykot’s comments are more than fair.

    Now, with regards to MER, GS, MS, and the the other fins moving into the energy trading space, here’s something to consider: capital is capital. Because a greater percentage of capital allocated to energy trading used to be backed by XOM and locals in the pits, that’s a good thing? I used to shop at Ace Hardware but now Home Depot runs the show. That might not be a bad thing IMO.

    We need speculators, they are important because they get the price where it needs to go. Talking about the virtues of having only the E&P companies (“real users” and “hedgers”) trade energy is silly. I wouldn’t be keen on Blackrock, State Street, Vanguard, etc. being the only ones allowed to set stock prices. No sir, that makes no sense. Or what if Italy and Spain were the only ones allowed to trade Spanish and Italian debt? “See, I paid par for your bond and you paid par for mine.”

    As much as we may dislike them, the guys at Morgan Stanley have just as much real economic purpose trading crude as does HES. Their job is the same: get the price where it should be. If they are wrong they pay the price. John Arnold: gone. Amaranth: gone. Metallgesellschaft: gone. Enron: gone. LTCM: gone. LEH: gone.


    It’s your right to dislike the changing composition of who dominates trading. That will continue to change, it always has. But understand that XOM and CVX and BP all their own interests at heart. XOM wants as much as it can get from me at the pump, and that’s a fact. Speculators are there to set the price and keep the producers in check, just like the producers are there to keep the specs in check.

    The job of the guys @ J. Aron is to make money. The job of the guy @ Tudor trading crude is to make money. Same for the guy at Milburn Ridgefield and John Henry and Graham. They do that by taking the other side of what they think are stupid trades. Everybody’s job is the same: get the price where it should be.

    And to ignore the fact that Fed policy has no bearing on the fact that all commodities are up, up and up, that’s more than a small ommission. The two largest central banks on the planet are trying to stabilize the global economy by pegging stock prices higher than where they otherwise would be. They’ve said so expressly. And China? China is just silly at this point.

    The job of the traders is to get the price where it should be. To the extent the market believes Bernanke can inflate debt away, it might be safe to believe that oil’s going higher.

    Arab spring in 2011? China’s massive capex buildout and commodity stocking frenzy? Oil goes up.

    Nobody except the producers of gas is complaing about natty gas on its knees. Plenty of specs in that complex, that’s for sure.

    Specs have a weird job, Seykota suggests it’s perverse. But it’s a pretty legit job. Get the price to where it needs to be. Do that and you tend to avoid serious supply and demand issues.

  20. different clue

    What is wrong with driving up the price of gas? The more gas costs, the less we use of it today which means the more we have left for tomorrow. The less gas costs, the more we use of it today and the less we have for tomorrow.

    The way to encourage conservation is to punish waste, and the way to punish wasting gas is with punitive pricing.
    The only question in my mind is: who should get the punishment money? Private chiselers or public government authorities who could invest the money for public benefit?
    If gas here were taxed like it is in Europe and Japan, and the tax-money were spent on anti-gas/anti-car upgrades to our mass transportation system, we could recover a bit of the mass transit we had before America’s Bonfire of the Trains, Trolleys, and Streetcars.

  21. Chris Cook

    Les Leopold is completely correct that the oil market – like the equity markets and other organised commodity markets – have become financialised.

    He is also correct that the investment banks are – together with a couple of producers – to blame for this.

    But I am afraid that he otherwise suffers from the pervasive misconceptions as to how the oil markets actually work which affect politicians, press and populations generally, but in the US in particular.

    I explained at length here at Naked Capitalism the actual mechanics of the oil market and of the macro manipulation which has afflicted it in the last 15 years.

    Suffice to say that active investment or ‘speculation’ – in terms of taking risk or ‘gambling’ in pursuit of transaction profit – has nothing whatever to do with the high price of physical oil.

    The financialisation has been caused by ‘passive’ investment in index funds and exchange traded funds which have been mis-sold to risk averse investors who have been bamboozled into ‘hedging inflation’……and thereby actually indirectly (via Enron-style prepay transactions) causing the inflation they aim to avoid.

    The financial transaction tax is not a bad idea if (say) levied on the gross revenues of financial intermediaries as a Limited Liability Levy. This would essentially be compensation to society for the implicit guarantee extended to institutions ‘too big to fail’.

    But in terms of its stated aims:

    (a) it is impossible to distinguish a speculative transaction from its complete opposite – a ‘hedging’ transaction;

    (b) the ‘speculators’ blamed will shortly – when the current bubble collapses – become the greatest losers as their bets blow up in their face and potentially cost them a multiple of their stakes.

    There are no winners here other than the middlemen, and since October 2008 they have made out like bandits not by gambling shareholder or government money but by acting like a Casino operating a roulette wheel with maybe 10 zeroes.

  22. Tim

    Follow the logic:
    High oil prices hurt economic growth as said in article

    Also oil speculators bid up oil when QE occurs

    Obama and Bernarke REALLY want to be able to do another round of QE to goose the economy before the election, but won’t do it if oil spikes

    Obama, get’s tough on oil speculators by funding enforcement

    The big banks need to be careful about biting the hand that feeds them here. I really do think the speculator premium is going to come out of oil in the next few months

  23. A Real Black Person

    I can’t believe the audience of “educated people” here have taken another claim of oil speculation seriously.

    There is no demonstrated proof of oil price manipulation by the finance market. NONE!

    No one can point to one financial instrument that allows investors to “make oil prices go up”.

    These “oil speculation” articles that pop up everytime economic activity increases are red herring, to keep the average person in the dark about the fact that in a globalized economy, a lot more oil is being used to move items around and that very little new oil can be found. Oil speculation is an irrational conspiracy theory meant to mask the entitlement mentalities of people used to a lifestyle made possible by oil. “Oil speculation” is safe. It doesn’t require people to practice family planning or conservation, or localize energy production of renewable energy. “Oil speculators” are abstract boogeymen that can be blamed for disasterous energy and economic policies–which most people will only realize were disaterous in hindsight.

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