Oil Slicks: Who Benefits From Gambling on Gas Prices?

Richard (RJ) Eskow – Consultant, Writer and Senior Fellow,  Campaign for America’s Future Posted: 02/22/2012 5:29 pm

Anybody who doesn’t believe that energy speculators can change election results might want to ask Gray Davis, the former Governor of California who was removed in a recall drive partly prompted by voter frustration over California’s ongoing energy crisis. Only afterwards did we learn that the crisis was caused by speculators who backed his opponents’ deregulatory agenda — and benefited from it.

Coincidence? We report, you decide.

And anyone who doesn’t believe that gas prices affect election results might want to ask former President Jimmy Carter. If the 1980 election hadn’t turned out the way it did we might be living in a very different world.

Today gas prices continue to rise, despite the fact that demand for oil is lower than it’s been in the last fifteen years. Are speculators affecting our fate again? That’s the subject of heated technical debate, although I find the evidence very compelling. But here’s something to consider: The prime suspects for oil speculation — Goldman Sachs, the Koch Brothers, etc. — are the people who are fighting tooth and nail to make sure government never has the power to investigate their actions.

Here’s the California scenario in a nutshell: Deregulation unleashes the dogs of speculation on energy markets, driving up prices and creating scarcity. A moderate Democrat loses office as a result, turning the reins of power over to a Republican who calls for … more deregulation.

Could it happen again?

Speculation Speculation

People keep debating the question, just as they did in 2008: Are speculators affecting oil prices? Skeptics point to the crisis in Iran and recent signs of increased demand as real-world factors that could affect prices. But end-user demand remains low.

I find the pro-speculation arguments compelling. But the professional approach to any financial question requires us to “put the ‘anal’ in ‘analyst,'” so the most professional thing to say is: We don’t know for sure. And we can’t know for sure until the government gets the authority and the resources to investigate fully. (More about that in a minute.)

Here’s what we do know: Oil prices rose while demand fell. Futures and other financial instruments have allowed all sorts of people to bet on the oil market, along with other commodities markets, for more than twenty years. And whenever demand and prices don’t track together, something is happening that we can’t see.

If prices are rising based on expectation that things will get better in the future, that suggests speculators are at work. And if they fall whenever there’s a sign of an upcoming economic storm, that also suggests that prices are being driven by intermediaries who are gambling on the future rather than suppliers responding to demand.

Those intermediaries happen to be the same people who keep lobbying to make sure we don’t have the ability to find out what’s happening or the authority to stop it.

The Skeptics

Some of the people who reject the idea that speculators are at work are also defending a separate but related idea: That oil is a limited commodity and we’re overly dependent on it. That’s true, and some people are afraid that the “speculator” argument will be seen as a blank check to continue our over-reliance on oil.

But two things can be true at the same time: Speculation may be affecting the price of a commodity that will nevertheless continue to grow in direct and indirect cost, meaning that we should therefore begin reducing our dependence on it.

The Case

Why is the case for oil speculation prices so compelling? Not only is there that mysterious divergence between demand and price, but there are also convincing analyses like the one Michael Masters did which linked the last price surge to $60 billion in speculator purchases.

Twenty years ago, speculators purchased roughly 30 percent of the world’s future oil deliveries. As of 2011 that number has risen to 70 percent. They wouldn’t be doing it if there weren’t money to be made. It’s hard to believe that they would stake trillions of dollars merely on the wisdom of their educated guesses — especially if they had the opportunity to manipulate the results instead.

You can count Goldman Sachs among the believers. Last year it issued a warning that speculation was getting out of hand and driving prices too high. Since Goldman was present at the creation of the speculation market, it has a lot of credibility on the topic. Nobody knows more about Frankenstein’s monster than Dr. Frankenstein himself.

Speculation/Manipulation

Speculation is one possible cause of rising prices. Another is outright price manipulation, as took place in California.

If we have no clear proof that speculators are driving prices, that means we also lack proof of outright manipulation.

How do we get proof? There are three possible scenarios: One is that speculators are innocent of any wrongdoing, and aren’t even hurting the economy. Another is that they’re acting legally, but destructively, which may spur calls for new legislation. And the third is that some of them are engaged in criminal behavior.

The way to find out is through government investigation, and by strengthening the regulatory power of the appropriate agencies. But look who’s blocking those actions.

Cui Bono?

As the old prosecutors used to say, Cui Bono? Who benefits? The people who would have both the motive and the opportunity to manipulate markets are the same people who are blocking real investigations.

Wall Street firms have been at the forefront of blocking even the mild financial reforms of Dodd/Frank — reforms which include increased limits on their ability to gamble in the commodities market.

Energy distributors like the infamous Koch Brothers also have both motive and opportunity. The Koch Brothers own oil suppliers and distributors, and introduced the first oil-indexed Wall Street swap way back in 1986. As suppliers, they can influence price. As speculators, they can make a fortune.

Wall Street firms and energy distributors also happen to be pouring enormous sums of money into Washington to make sure they’re never subjected to meaningful regulatory oversight. They’re in bed with a number of prominent politicians, especially in the GOP. (Ten years ago they were literally “in bed” with one another, since Sen. Phil Gramm’s wife was on Enron’s board even as Gramm pushed the deregulation of oil speculation.)