The Wall Street Journal has a big scoop this morning that the Obama administration is set to report next month that speculation has been a primary driver of super-volatile oil prices.
That’s the exact opposite conclusion of a Bush administration report by the same agency, the Commodity Futures Trading Commission, last year, which one commissioner—a Bush appointee—now says was based on “deeply flawed data.”
The Journal doesn’t have any of the data from the report here, only an interview, so it’s impossible to tell just what the CFTC has, if it has anything at all.
But regardless, it could be politically explosive at a very bad time for Wall Street.
Speculators have been a lightning rod of criticism from politicians world-wide, who worry that rising oil prices could damp the recovery potential of their recession-hit economies. Many lawmakers and regulators say they want to ensure that speculators don’t make it more costly for consumers to access heating oil, food and other essentials.
It’s worth revisiting Matt Taibbi’s piece on Goldman Sachs for his theory on what happened last year to drive gas prices over $4 a gallon.
With the public reluctant to put money in anything that felt like a paper investment, the Street quietly moved the casino to the physical-commodities market — stuff you could touch: corn, coffee, cocoa, wheat and, above all, energy commodities, especially oil. In conjunction with a decline in the dollar, the credit crunch and the housing crash caused a “flight to commodities.” Oil futures in particular skyrocketed, as the price of a single barrel went from around $60 in the middle of 2007 to a high of $147 in the summer of 2008…
But it was all a lie. While the global supply of oil will eventually dry up, the shortterm flow has actually been increasing. In the six months before prices spiked, according to the U.S. Energy Information Administration, the world oil supply rose from 85.24 million barrels a day to 85.72 million. Over the same period, world oil demand dropped from 86.82 million barrels a day to 86.07 million. Not only was the shortterm supply of oil rising, the demand for it was falling — which, in classic economic terms, should have brought prices at the pump down…
So what caused the huge spike in oil prices? Take a wild guess. Obviously Goldman had help — there were other players in the physical commodities market — but the root cause had almost everything to do with the behavior of a few powerful actors determined to turn the once solid market into a speculative casino. Goldman did it by persuading pension funds and other large institutional investors to invest in oil futures — agreeing to buy oil at a certain price on a fixed date. The push transformed oil from a physical commodity, rigidly subject to supply and demand, into something to bet on, like a stock. Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed.
Note that Taibbi’s hardly the first person to say that the money from the housing bubble moved to form the commodities bubble, which remember, not only sent gas prices skyrocketing but helped cause dangerous food disruptions around the world.
He is one of the first prominent journalists I’ve seen to report that the massive oil spike had little or nothing to do with supply and demand for the physical product. I’d like to see some more reporting on that. If he turns out to be right, the financial press is going to have an awful lot of explaining to do.
It seems clear the CFTC report will lend credence to Taibbi’s assertion that Wall Street and Goldman Sachs (an Audit funder) caused the oil spike, which he says wouldn’t have happened if trading were limited to those who had physical control of the oil, excluding those betting with derivatives.
Dean Baker offered a solution to this suspicion last year.
http://www.guardian.co.uk/commentisfree/2008/aug/11/oil.commodities
For those who actually want to crack down on speculators in a meaningful way, there is a much more practical solution: tax it. A modest tax on all financial transactions will impose a serious cost on those who actively speculate in oil futures, or any other commodity, while having almost no impact on those who use these markets for hedging. It can also raise an enormous amount of money.
A 0.02% tax on the sale or purchase of commodity futures, and a comparably sized tax on options and other derivatives, the tax could easily raise more than $10bn a year, even assuming large declines in trading. If a comparably small tax were applied to all financial transactions, including stock and bond trades, the revenue could exceed $150bn a year, a take that is equivalent to 10% of the federal income tax.
And hey, that could fund Health Care Reform. Win-win-win!
#1 Posted by End The Echo, CJR on Tue 28 Jul 2009 at 10:48 AM
Keep in mind Exxon-mobile among many had record year after record year in profits. A glance back into the 90s and we see a good year was 7 Billion in income. In the final climax, 2008, they earned 46.7 Billion. Essentially they were averaging a half decade or more in profits iyear after year starting in 2003 and ending in 2008.
I don't think a tax that raises 10 billion a year is going to even make a blimp on the the trillions that have been lost with the rising cost to service the debt of the country because of the social costs arising from the economic disaster that it caused. As far as the 150 Billion in trading revenue?
At the end of 2008, Battered, beaten, bruised, and cut, the American middle class finished the year in more debt with huge losses in their savings and their home values while Exxon Mobile earned 45 Billion and the Taxpayers bailed out Citibank for 45 Billion. By Jan 2009 jobs were being eaten alive. How does 150 billion touch that? We have a long way to go to get back to when things were just bad. If we ever get there.
#2 Posted by Don Burnstein, CJR on Wed 29 Jul 2009 at 07:10 PM
if the people would do some research as the crude market was at its highest level last july at 14700 a barrel the net position for big traders was a short position meaning they were selling the market not buying it and it was their highest net short position in more than a year so how can you blame some traders for high prices they were actually short
#3 Posted by foot, CJR on Thu 30 Jul 2009 at 09:48 AM