Moon of Alabama Brecht quote
June 22, 2008

Economic War Between OPEC and the U.S. Financial System

Oil markets are in a bubble driven by speculation. While peak oil is a real concern, it does not explain recent short term price moves. People drive less now in the U.S., China has increased its subsidized oil prices by 17.5% and airlines have stopped flying certain routes. Supply has stayed fairly constant. Still prices are going up.

The speculation is driven largely by U.S. financial entities that trade in unregulated commodities with over the counter derivative contracts. F. William Engdahl has explained how the mechanisms works and Pam Martens points to the massive involvement of Citibank and other big players.

The OPEC folks are pissed. They know the prices they are selling their oil for are far below the top prices in the commodity markets and they know that some of the barrels they offer find no buyers. They do know that it is speculation that drives this. The current too high prices will make people develop other energy sources and will destruct the long term demand for their product. They learned that lesson in the 1970s and do not want to repeat it.

At the same time there is a serious systematic attack on OPEC underway in U.S. politics. A year ago Ed Koch, the former mayor of New York, called for more legislative and presidential action to take on OPEC in the Jewish World Review. In May Hillary Clinton said OPEC 'can no longer be a cartel'. This week saw calls for action against OPEC from mainly Democratic legislators and op-eds on the issue in two major papers. On the same day the LA Times and the  NY Times headlined these Sue OPEC.

The Saudis have called for an international meeting on oil prices that is taking place right now. Pat Lang thinks they are very serious about the issue.

The U.S. position is that there is no speculation and no action needed:

US Energy Secretary Samuel Bodman said on Saturday that speculators were not forcing up global oil prices, which nearly hit 140 dollars per barrel this week.

"There is no evidence that we can find that speculators are driving futures prices," Bodman told a press briefing ahead of Sunday's summit in Jeddah that will bring together consuming and producing nations to address the global energy crisis.

Bodman isn't even lying. He can not find the evidence because the U.S. Commodity Futures Trading Commission allows U.S. financial institutions to trade unregulated and unsupervised in the London ICE Futures market. If you don't look for evidence, you will not find any.

OPEC, and especially the Saudis, will have to think of new ways to pressure the U.S. for more regulation in the future markets. They also have to look at serious local inflation issues connected to their currency peg to the dollar. I can think of several possible tools available to them to help on both issues. Watch the dollar to go down much further when this economic war escalates.

This leaves the question why the U.S. administration is allowing such speculation that will likely hurt its party in the next election and might bring serious economic harm. I believe this is out of necessity.

Financial institutions lost about $1 trillion in the credit bubble and many of them are in dire state. The Fed gave them $500 billion in fresh money taking junk bonds as collateral and keeps the interest rates much lower than justified. The banks now again have the money to speculate in the markets and to use the profits from these speculations to heal their balance sheets.

The commodity bubble is to a large part a concerted action to keep the USuk financial system alive. Consumers all over the world and the oil producer have to pay for that.

If the Saudis see this the same way than I do, they will recognize that only severe financial action will stop the scheme.

Posted by b on June 22, 2008 at 18:48 UTC | Permalink

Comments

OPEC might find some allies within the Oil Majors. Recall what Mr. Carrol said:

Philip Carroll, the former CEO of Shell Oil USA who took control of Iraq's oil production for the US Government a month after the invasion, stalled the sell-off scheme. (...) Ariel Cohen, of the neo-conservative Heritage Foundation, told Newsnight that an opportunity had been missed to privatise Iraq's oil fields.

He advocated the plan as a means to help the US defeat Opec, and said America should have gone ahead with what he called a "no-brainer" decision.

Mr Carroll hit back, telling Newsnight, "I would agree with that statement. To privatize would be a no-brainer. It would only be thought about by someone with no brain."

and Ms. Jaffe:

Ms Jaffe says US oil companies are not warm to any plan that would undermine Opec and the current high oil price: "I'm not sure that if I'm the chair of an American company, and you put me on a lie detector test, I would say high oil prices are bad for me or my company."

Posted by: Pitirre | Jun 22 2008 20:06 utc | 1

Slim chance for action by Bush aka Big Oil.Con
In case American MoA's haven't figured it out yet, the NeoZi.con vampiroyals are packing their golden suitcases for Dubai, where the new oil bourse will be traded and speculated.

There's nothing more profitable than the mafia. Welcome to the global gulag, comrade! At least you're not eating mud cakes for dinner tonight! You mooks voted these asshats, twice! Now asshat-in-Chief is spreading more "yellow cake" lies about China offshore Florida!

When are you going to indict and impeach those mf'rs, before they escape to Dubai!?
Does the world have to end up in chains and in flames before you turn off your TVs?
What the hell is wrong with you Americans, addle-brained on Dancing with the Stars??

Posted by: Charlie Tuna | Jun 22 2008 20:07 utc | 2

A big chink of ICE is owned by Deutsche Bank, French, Dutch and Singaporean and anglo/American finance capitalists own the rest.

"US Financial System."

Nuh-uh.

Posted by: slothrop | Jun 22 2008 20:29 utc | 3

Via The BRAD BLOG:

On the other hand, in a single step tomorrow --- closing the Enron Loophole --- Congress and George Bush could create an overnight drop in oil prices of between 25 and 50 percent. This is according to testimony before a Senate Committee two weeks ago by Michael Greenberger, the former director of Trading & Markets for the Commodities Future Trading Commission (CFTC), the government board that oversees commodities markets.

Posted by: Dick Durata | Jun 22 2008 22:06 utc | 4

Obama calls for oil crackdown


1) Fully Close the “Enron Loophole”: One of the reasons our energy market is particularly vulnerable to excessive speculation is the so-called “Enron Loophole” … [which means] Commodity Futures Trading Commission (CFTC) is unable to fully oversee the oil futures market and investigate cases where excessive speculation may be driving up oil prices. This regulatory gap is dangerous because: 1) the absence of government oversight has the potential to facilitate abusive trading or price manipulation. And 2) the failure of a large derivatives dealer could trigger disruptions of supplies and prices in energy markets. As President, Barack Obama will go beyond the changes included in the recently-passed Farm Bill and fully close the Enron loophole by requiring that U.S. energy futures trade on regulated exchanges. He will call for new, disaggregated data on index fund and other passive investments to increase transparency and oversight of the growing number of institutional investors participating in commodities futures markets. And he will support legislation directing the CFTC to investigate whether additional regulation is necessary to eliminate excessive speculation in U.S. commodities markets, including higher margin requirements and position limits for institutional investors.

2) Ensure That U.S. Energy Futures Cannot be Traded on Unregulated Offshore Exchanges: CFTC oversight of oil market speculation is also limited by rules that allow energy traders to engage in unregulated transactions through foreign subsidiaries of U.S. exchanges. Currently, about 30 percent of U.S. oil futures trades fly below the regulatory radar because they are transacted on a U.S. exchange that works through a subsidiary in London. Similar arrangements are being pursued by U.S. exchanges in partnership with Dubai as well. Barack Obama would limit the price impacts of excessive speculation by preventing traders of U.S. crude oil from routing their transactions through off-shore markets in order to evade speculation limits and also impose reporting requirements.

3) Work with Other Countries to Coordinate Regulation of Oil Futures Markets.

4) Call on the Federal Trade Commission and Department of Justice to Vigorously Investigate Market Manipulation in Oil Futures.

Posted by: jony_b_cool | Jun 22 2008 23:19 utc | 5

More discussion at Daily Kos:

* Saudi Arabia is promising the oil (and/or production capacity) it has been promising again and again over the past 5 years;

* they are claiming to have spare capacity when numbers suggest that it is much lower than they claim, and made up mostly of "sour" crude that refiners might be interested in (if they can actually process it) only with deep discounts that the Saudis won't offer - so it's smallish, inconvenient spare capacity created by, effectively, offering it for sale at a price significantly higher than current market prices;

* they keep on playing with the various oil qualities to announce numbers that are not comparable to one another - but which they nevertheless proceed to compare in their announcements - not surprisingly enough, to make things look better than they are.

Posted by: Pitirre | Jun 22 2008 23:30 utc | 6

todays call by Obama for closing loop-holes in CFTC regulation of oil futures should by itself immediately have some deterrent impact on speculation and crude prices. We'll see what happens in the next few days.

Posted by: jony_b_cool | Jun 22 2008 23:51 utc | 7

I cannot see the financial sector actually trying to recapitalize by means of commodity speculation. Instead they would simply go to their colleagues on the government side of the revolving door and direct their captive regulators to dish them up some economic rents. Individual entities might bet the farm on oil, or pork bellies - but only if they lack access and iff they are at the very end of their rope. If you guys are really convinced that this is a sectoral trend, you're saying it's curtains.

Wouldn't it be lovely to think so?

Posted by: ...---... | Jun 23 2008 1:23 utc | 8

ICE is partly owned by Deutsche Bank, etc.

And?

Posted by: | Jun 23 2008 15:56 utc | 9

The usual effort to locate all the evils of finance capital in the practices of "US financial interests" (whatever that means) is sloppy analysis. ICE itself is owned by "Euro-asian financial interests" (whatever those are). Investors in the energy and commodities bubbles include the pensions of Polish babushkas.

Point is, if ICE Europe was so concerned about venal American finance capitalists using this "loophole" to play games with the price of oil, ICE directors could have said no.

Posted by: slothrop | Jun 23 2008 17:06 utc | 10

Like US trading houses were concerned financial scams in the past, you mean?

Posted by: | Jun 23 2008 17:26 utc | 11

Damn those Polish babushkas.

The SEC better get to the bottom of these nefarious (partly) nefarious speculators.

Posted by: | Jun 23 2008 17:30 utc | 12

ICE itself is owned by "Euro-asian financial interests" (whatever those are).

Any link or proof for that assertion? I seriously doubt it.


Reuters: Factbox: Investment banks in energy markets

The futures markets where oil is traded include the New York Mercantile Exchange, the world's biggest energy futures market, and ICE Futures Europe, owned by Atlanta-based Intercontinental Exchange Inc.
...
Oil and other energy derivatives are also traded over-the-counter. These markets are estimated to be between 10-15 times bigger than the ICE and NYMEX.

Wikipedia: IntercontinentalExchange
In May 2000, IntercontinentalExchange (ICE) was established, with its founding shareholders representing some of the world’s largest energy traders.
...
ICE became a publicly traded company on November 16, 2005, and was added to the Russell 1000 Index on June 30, 2006.

Posted by: b | Jun 23 2008 17:43 utc | 13

Sure, b.

http://www.aep.com/newsroom/newsreleases/default.asp?dbcommand=displayrelease&ID=737

Also via lexis, look at the SEC and EDGAR business databases on ICE. Very interesting assortment of institutional investors, b.

Of course, in your interest to preserve your well-published beliefs, think what you wish.

Posted by: slothrop | Jun 23 2008 18:51 utc | 14

@14 - I don't have access to lexis etc. - costs too much.

The thingy you link to points to US and European big boys. But you asserted "Euro-asian financial interests" - I don't see any of that in your link.

Posted by: b | Jun 23 2008 19:00 utc | 15

sg is singapore. the other is french.

Which is all to say that the country of origin hardly matters, because finance capital is as global as its class of investors.

You can bet that declining rate of profits compel more institutions than "Goldman Sachs" to exploit this "loophole."

Posted by: | Jun 23 2008 19:05 utc | 16

Funny Slothrop you left out Goldman Sachs, Morgan Stanley Dean Witter, and Societe Generale as initial ICE founders. But you did include Polish babushkas.

Of course you did.

Posted by: | Jun 23 2008 22:01 utc | 17

I would be very grateful to Slothrop for further material, perhaps gleaned from Lexis-Nexus and "pipelined" in some way to us, his downstream users and, dare I say, refiners. Extensive block quotes in this case would be quite justifiable. I found the link he provided in 14 to be quite interesting, and a useful counterpoint to b's links in the introduction. Of course, the contents of those links are subject to varying interpretations according to our varying choice of politico-economic postulates. My own feeling is that the list of founders of ICE reads like an honor roll of firms providing invitees to Bilderberger conferences and other elitist gatherings, which, as the Marxists used to say, is certainly no coincidence.

Posted by: Hannah K. O'Luthon | Jun 24 2008 15:26 utc | 18

This thread is haunted by a history that I've never understood very well, plain enough though it can sometimes seem. Call it the "violence arising from the creation of new markets".

New markets: Michael Milken's high-risk, high-yield bond market ("junk bonds"), constructed by him between 1975 and 1985; Marc Rich's spot market in oil, constructed at roughly the same time; the Chicago Board of Trades financial derivatives (futures?) markets, also created in the '80's; and the energy futures markets generated by Enron during the '90's. There must be many others of which I'm unaware.

When these markets arose, they certainly rattled the "status quo"--existing markets with existing regulations, controlled (or so it seemed) by institutions whose security had long been guaranteed by U.S. regulatory systems dating from the New Deal.

How to deal with these various threats? Back in the eighties, the obvious answer was to police and subordinate, if not to destroy, the upstart markets and their engineers. And since, by definition, the truly new markets (new products, new vendors, new consumers) were created outside the box of the old markets and their regulatory systems, it fell to the regulatory systems to police the upstarts. An interesting state of affairs: by definition, the new markets were culpable of something (viz. the taking of market-share from the owners of the old markets), and so the chase began.

It's not hard to build a case, finally, out of regulations. The trick is to insure that the making of the case destroys the upstart force. Milken was "nailed" on 98 minor infractions (this wasn't hard to do, since it's estimated that Milken personally executed something like 3 million transactions of various kinds in the space of a decade); Rich was nailed on tax-evasion charges; and Enron on those "raptor" funds whose actual import, in the grander scheme of things, has always escaped me.

The great exception to this was the CBOT and its allies: much as Nicholas Brady tried to subordinate them to the SEC in the late 1980's, he was soundly defeated by Congress in a really fierce fight (whose major players, if memory serves were Sen. Gramm and his wife Wendy, then the director (unless I'm mistaken) of the CBOT itself).

If there's a basic rule here, it might run something like this: if you invent a new market (a new, or newish, product sold by new vendors, operating on a scale that exceeds the competitive skills of the old markets), then the regulatory system is quickly mobilized by folks who are losing market share. Sometimes this works, in the sense that it drives the inventors themselves out of their business (Milken most certainly, Rich and Enron sort of), except that their new markets, and their surviving personnel, will be quickly appropriated by the old competitors, who thereby promptly "update" themselves and recover their market share.

What seems not to happen, however, is a huge overhauling of the given regulatory systems that would meet the challenge of the new markets. It's impossible to catch up. In fact it was always impossible to catch up--if only because the inventors of the original regulatory systems (under FDR) all came from Wall Street itself.

I haven't been following the energy markets of late--they're completely over my head--but they surely pertain to this pattern (allowing that the pattern may actually exist in the first place).

Posted by: alabama | Jun 24 2008 18:02 utc | 19

You should look up Michael St. Clair, a smart guy who is adept at several skills/professions, one of which is investment banking. His current advice is to put all of one's dollars into metals, as the dollar has another fifty percent of value to lose yet. Euro too, but later.

Current banking/trading system is in its death throes, so best not to stick with it too long.

Posted by: rapt | Jun 24 2008 19:02 utc | 20

yahoo is a good source w/ edgar database for public companies: http://finance.yahoo.com/q/mh?s=ice

Whatever. The ownership is global, which is a silly point to "prove" given the fact that a company's country of incorporation reveals nothing about its protean ownership.

It's just time to finally shed the childish belief that finance capitalism is a national phenomenon, clearly representing the interests of this or that "people."

Posted by: slothrop | Jun 24 2008 19:39 utc | 21

alabama@19,
you are absolutely right. the upstarts are still getting payed big time. But the big boys (big oil & big wall-street) are again the kings of the jungle.

Posted by: jony_b_cool | Jun 24 2008 23:10 utc | 22

Thanks to slothrop for the Yahoo-Edgar link. It's a bit of a surprise to find that I too am one of the "major shareholders" in ICE, via
my CREF account.

Posted by: | Jun 25 2008 9:41 utc | 23

michael hudson on guns & butter wed june 25th discussing his next book - "The New Road to Serfdom" - and then some should be archived soon here. he says u.s. gas will be $16/gallon in three years. lots, lots more in this recommended interview

also see
hudson: America's Free Lunch is Over: How Should the Middle East invest its Rising Trade Surplus?

The Game is over: An Interview by Mike Whitney with Michael Hudson on the Economy

more at his website

Posted by: b real | Jun 25 2008 20:53 utc | 24

erm, just to be accurate - the program was named "The New Road to Serfdom" and hudson's 2009 book is tentatively titled "The Fictitious Economy: How Finance Is Destroying Industrial Capitalism and Paving a New Road to Serfdom."

the mp3 is now available

Posted by: b real | Jun 25 2008 21:17 utc | 25

"TIAA-CREF: serving those who serve the greater good. "

That is their ad campaign in the US. I guess owning those who do not, is not a contradiction.

Posted by: boxcar mike | Jun 26 2008 12:54 utc | 26

Krugman is claiming that speculation can not drive oil prices because it can not be stored...

http://krugman.blogs.nytimes.com/2008/05/13/more-on-oil-and-speculation/

Contracts for the delivery of oil are are storable and hoardable without facilities, while the physical oil is not. The people in charge of securing oil for a refinery would need to be very brave to wait until the "future" is a day away to secure their supply. As long as the refineries are hungry, anybody can step into the futures market and buy confident that ultimately a buyer from a refiner will acquire the future before delivery must be taken. To break this cycle would require extreme bravery on the part of the refinery buyers, where they wait until the last moment when no speculators are willing to buy, and then swoop in. The risk associated with that is huge, buyers would lose their jobs if the refinery shut down for lack of oil. It also defeats the point of a futures market.

The mechanisms were different, but completely unstorable electricity certainly proved susceptible to speculation and market manipulation.

Posted by: boxcar mike | Jun 26 2008 12:59 utc | 27

@27
Krugmans article does not mention the word manipulation once. And that speaks a lot.

Posted by: jony_b_cool | Jun 26 2008 13:55 utc | 28

Just to notice: Oil broke $140/bl today.

I wonder hoe the Saudis feel about that ...

Posted by: b | Jun 26 2008 19:17 utc | 29

I wonder hoe the Saudis feel about that ...

http://news.yahoo.com/s/afp/20080616/bs_afp/stockseurope_080616110306>link

I'd imagine they think high oil prices are fucking up the world economy.

http://www.youtube.com/watch?v=TIJRXb_uzkM>This was linked to by the craven war-mongering-CIA-backed-academic-whore, Juan Cole.

Posted by: | Jun 26 2008 21:07 utc | 30

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