The 'Enron Loophole' and energy speculation Dark Markets

[waltky]

Some background on Obama's comment about the 'Enron Loophole'...

Speculators and investment banks can game the energy trading markets, using loopholes in commodities law to drive up the cost of energy and reap record profits… at the expense of American families and small businesses!

One of the biggest factors in high oil prices, according to many experts, is that investors, such as hedge funds and investment bankers, can use loopholes in commodities law to manipulate the market and drive crude oil, heating oil, gasoline and diesel fuel prices to new heights. Congress is aware of the problem and lawmakers recently passed legislation to address the “Enron Loophole,” one of the major loopholes that opens the door to abusive trading practices, but the law didn’t go far enough.

Unfortunately, other loopholes exist that allow energy trading on completely “dark” exchanges. For example, the “Foreign Markets Loophole” allows American energy commodities to be traded overseas – exempt from U.S. oversight. These so-called “Dark Markets” – commodities markets that are not policed by U.S. authorities provide for an open the door to manipulation, even outright control of the markets.

For example, speculative investors can buy and sell millions of barrels of U.S. destined oil and other energy products every day in the United Kingdom and even in Dubai… but are not made subject to the transparency and accountability laws that govern exchanges here in the United States! Additionally, through the so-called “swaps loophole,” financial investors can “game the markets” for pure profit by buying up positions in the energy markets, without any limitation on the size of the positions they can take. One recent estimate suggested that they now control one third of the commodities markets, or $150 billion - a 1,000% increase in less than five years!

Some experts believe that as much as 60 percent of the cost of a gallon of gasoline or heating oil can be attributed to pure speculation and abusive –even manipulative – trading practices, yet most trading is “dark” and federal authorities can neither fully police or see the data in the majority of the trading markets. The energy trading markets were originally set up to provide energy producers and distributors with an environment to manage risk and produce the best possible price for their customers. But they are clearly no longer the driving force in the market. Profiteering speculators and investment banks care little about establishing a price for energy based on supply and demand fundamentals – they care about turning a PROFIT.

More Stop Oil Speculators. Send Congress An S.O.S.

Granny got a sneakin' suspicion some o' dem Enron people workin' for ICE (International Commodities Exchange) now.

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King Abdullah critical of speculators
Monday 23rd June, 2008 - Saudi Arabia's King Abdullah has slammed so-called oil speculators for forcing the price of a barrel of oil up to almost 140 dollars.

Amongst other factors, he blamed the “unjust increase in oil prices” as an act of speculators seeking to undermine the market. On Sunday, the king opened a summit over the soaring price of crude, which has created divisions in OPEC as to whether production should be increased.

The king announced that Saudi production had been put up to 9.7 million barrels a day, the highest figure since 1981. He said his country would give 1.5 billion dollars to efforts to ease energy shortages in poorer countries and told the 36 nation summit his country was very concerned about consumers everywhere.

Some other countries also seem to be preparing to increase production, including Kuwait. Kuwaiti Oil Minister Mohammed al-Olaim said that OPEC members would not hesitate to increase production if the market needed it.

King Abdullah critical of speculators

[waltky]

But they are the ones bidding up the price of a barrel of oil...

Don't blame the oil 'speculators'
June 27, 2008: A campaign in Congress to punish traders for record oil prices reveals a fundamental misunderstanding of how futures markets work.

"Make no mistake about it," U.S. Rep. Bart Stupak, D-Mich., said Monday while chairing a meeting of the House Energy and Commerce subcommittee on Oversight and Investigations. "Excessive speculation in commodity markets is having a devastating effect at the gas pump that is rippling through our entire economy."

Here's a suggestion: The next time a Congressional committee wants to hold a hearing on how "speculators" are driving up oil prices, each committee member should first be required to demonstrate - preferably in their opening remarks - a basic understanding of the mechanics of futures trading. Even better, they should be required to explain in detail how it is that investors who never take delivery of a single barrel of crude - and thus never remove a drop of oil from the open market - are causing record high oil prices.

If there were such a requirement, I guarantee we'd never again see a circus like the one Stupak presided over Monday. "Do I think [Washington politicans] understand the role of futures markets - how they facilitate price discovery and the transference of risk?" asks former U.S. Commodities Futures Trade Commission chief economist Gerald Gay. "No, they're clueless - at least most of them."

Bad public policy

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Road Warning: $7 Gas May Be Ahead
June 26, 2008 - Economist Predicts Increase By 2010, Which Would Take 10 Million Cars Off The Road

A new energy report predicts $200-a-barrel oil in as short a time as two years. If that happens, gas would likely go up to $7 a gallon - and that would have an enormous impact on the way Americans live. Mitchell Igelko in Miami complains rising gas prices are threatening his 20-year-old landscaping business. His two biggest trucks sit idle - he can't afford to fill them up.

Right now, Igelko's business averages $30,000 a month in gas - at $7 a gallon, that would jump to about $50,000 a month, CBS News correspondent Priya David reports. "I think at that time, I'm gonna put a sign 'gone fishing,'" he said. Economist Jeff Rubin predicts the $7 mark will arrive by the year 2010.

Hardest hit will be those for those making less than $25,000 a year. For them, gas will go from 7 percent of their income to a whopping 20 percent. "People are going to be spending more on gas than they are on groceries," said Rubin. "And that's not a sustainable choice." In fact, by 2012, higher prices could send an additional 10 million vehicles off the road.

MORE

[waltky]

We need another 40% in auto fuel economy to offset this...

Options traders bet oil could jump another 40 pct
Fri Jun 27, 2008 - Oil options have spiked to prices that imply crude could rise another 40 percent as recent big moves in the crude contract prompt heavy buying of protection against further price increases.

Implied volatility, the theoretical amount traders expect oil to move based on the price they pay for an option, has surpassed 40 percent on many key contracts, according to calculations made from Reuters data. "There's a great deal of uncertainty where prices are going," said John Kilduff, senior vice president at MF Global in New York.

"It shows how dear supplies are seen by a lot of people and just how powerful this bull market is and it could push more people into the bull camp when they see the prices people are paying for these options." The December $150 a barrel call option hit $11 a barrel by midday on Friday, up nearly eightfold from $1.45 a barrel on May 1.

A $150 call option gives the buyer the right but not the obligation to buy the underlying futures contract at $150 a barrel. A trader who intended to exercise a $150 call after paying a $11 premium would not make a profit unless oil futures surpassed $161 by December. Oil prices have jumped more than 45 percent this year to top $142 a barrel on Friday on tight global supplies, shattering records and hammering automakers, airlines and cash strapped consumers.

More Options traders bet oil could jump another 40 pct | Special Coverage | Reuters

[waltky]

Even with increased supply, without more refineries, there won't be much effect on gas prices and speculators will continue to have a field day...

America's untapped oil
June 29, 2008: Lawmakers lay into big oil for leaving million of acres untouched while at the same time asking to drill in Alaska and off the coasts.

Oil companies and many lawmakers are pressing to open up more U.S. areas for drilling. But the industry is drilling on just a fraction of areas it already has access to. Of the 90 million offshore acres the industry has leases to, mostly in the Gulf of Mexico, it is estimated that upwards of 70 million are not producing oil, according to both Democrats and oil-industry sources. One Democrat staffer said if all these existing areas were being drilled, U.S. oil production could be boosted by nearly 5 million barrels a day, although the oil industry said that number is far too high and one government agency said it was impossible to estimate production.

Recent proposals to open up offshore coastal areas near Florida and California, as well as Alaska's Arctic National Wildlife Refuge, might yield 2 million additional barrels, according to estimates from various government sources that also stressed the difficulty in making forecasts. The United States currently produces 8 million barrels of oil and other petroleum liquids a day and consumes about 21 million.

Oil companies "should finish what's on their plate before they go back in line," said Oppenheimer analyst Fadel Gheit. Some Democrats also charge that oil companies are deliberately not drilling on the land to limit supply and drive up oil prices. "Big Oil is more interested in pumping up prices and pumping up their own profits rather than pumping more oil," said Rep. Edward Markey (D-Mass), who has co-sponsored a bill to charge oil companies a fee for land they hold that's not producing oil. "We should not even begin discussing handing over more public land to the oil companies until they first use [the land] they already hold."

MORE

[waltky]

May be why speculators are making money while they can...

Giant Saudi field is key to boosting oil output
Sun., June. 29, 2008 - Remote Khurais project should be supplying crude by June of next year

This massive oil field surrounded by the desolate sands of Saudi Arabia's vast eastern desert feels like the middle of nowhere. But what happens over the next year at Khurais, one of Saudi Arabia's last undeveloped giant oil fields, could hold the key to what drivers will pay at the pump for years to come. Under way at Khurais and two other smaller fields nearby is what Saudi Arabia calls the single largest expansion of oil production capacity in history.

With consumers howling over record fuel prices and the United States pushing Saudi Arabia to produce more oil, this patch of sand 100 miles west of the Saudi capital of Riyadh has become one of the most important places in the world economy. Saudi Arabia's state-owned oil company, Aramco, is spending $10 billion to build the infrastructure to pump 1.2 million barrels of oil per day by next June from the Khurais field and its two smaller neighbors. That alone would be more than the total individual production of OPEC members Qatar, Indonesia and Ecuador.

The project forms the centerpiece of the Saudi plan to increase the total amount of oil it can produce to 12.5 million barrels per day by the end of 2009 — up from a little more than 11 million barrels per day now. Consuming nations have pushed Saudi Arabia to boost production capacity even further and also want the world's top oil exporter to begin pumping more crude immediately to bring down record oil prices hovering near $140 a barrel. They say oil production has not kept up with increased demand, especially from China, India and the Middle East.

More Giant Saudi field is key to boosting oil output - Oil & energy - MSNBC.com

[waltky]

Indians onna warpath over high fuel prices...

Five million truck drivers go on strike
Wednesday 2nd July, 2008 - As many as five million truckers have gone on strike in India to protest against the surge in fuel prices and claims for trillions of rupees in tax arrears.

The All India Motor Transport Congress has been at loggerheads with the finance ministry over the alleged evasion of service tax by goods transport agents.

In recent months, tax authorities have issued tax recovery notices, dating back to 2001. Last month, the government raised fuel prices by about 10 percent, attracting sharp criticism from the AIMTC.

The action threatens to cripple the transport network of the country at a time when India is struggling to maintain the economic growth achieved in recent years. Trucks carry more than half the country's freight.

Five million truck drivers go on strike

[waltky]

I can think of a couple of places oil can be hidden. The black market for one especially a 'black market' for a country which subsidizes the price of fuel, like China or Venezuela or any of the other OPEC nations. Since crude oil is not as expensive as the finished market, an inventory could be kept aside to create an artificial shortage with money still being made at current prices...

Hunting for oil villains
July 4, 2008: The story of the Hunt brothers, who cornered the market on silver in the 1970s, shows why speculators aren't driving up oil prices.

Atlanta hedge fund manager Michael Masters has been a star witness in two recent Congressional hearings on how speculators are supposedly driving up oil prices. Masters and I don't see eye-to-eye on this issue, so I was surprised to get a call from him after my "Don't Blame The Oil Speculators" column went up on Fortune.com last week. Masters contends that without speculators, the price of oil would be $65 or $70 a barrel. He points out that the amount invested in commodities index products has risen from $13 billion to $260 billion in five years, a fact he thinks is key to understanding oil prices.

"When a trader sends a buy order to the exchange floor or presses the 'buy' key on their trading terminal, if he or she is attempting to buy more contracts than are currently offered for sale at the market price, then the market price will rise," Masters told a House subcommittee in June. My own view is that speculators can't materially impact prices if all they're doing is making bets on the direction of oil prices by trading futures and not taking delivery of actual oil - hoarding stuff that would otherwise go to consumers.

People don't fill up their tanks with futures contracts, and there's no evidence investors are putting more oil into storage as a bet on higher future prices. In the end, Masters and I simply agreed to disagree. But there was one thing he said that really piqued my interest. "What do you think would happen," Masters asked, "if the market went into liquidation-only mode [i.e. if speculators started unloading their futures contracts], like we saw with the Hunt brothers in 1980?"

The lesson in silver

[waltky]

Environmentalists playin' into the hands of oil speculators...

Environmental Group Sues to Block Oil Refinery Expansion
Thursday, July 10, 2008 - An environmental group on Wednesday filed a lawsuit intended to stop the expansion of a BP oil refinery in Whiting, Indiana. A shortage of oil refining capacity is often mentioned as one reason for soaring gasoline prices.

The Natural Resources Defense Council (NRDC) is challenging air permits granted to the refinery by the State of Indiana. It’s part of the “ongoing fight against excessive pollution in northwest Indiana and Chicago,” the NRDC said in a news release.

The permits granted to BP by the Indiana Department of Environmental Management “simply do not protect the public and do not live up to the law,” said NRDC attorney Ann Alexander. “The failure of Indiana and BP to take the public interest and the law seriously has forced the issue and required that this case be brought before the federal courts.”

The lawsuit argues that BP and the Indiana Department of Environmental Management have not properly accounted for increases in pollution that will result from the refinery expansion. NRDC said the increased pollution requires the BP refinery to implement more effective pollution controls -- by operating under a more stringent “major source” permit. Just this week, G8 leaders meeting in Japan called for an increase in oil production and refining capacity to help curb soaring gasoline prices.

More CNSNews.com - Environmental Group Sues to Block Oil Refinery Expansion

[waltky]

Good news for the speculators...

White House threatens to veto oil drilling legislation
Thu Jul 17, 2008 WASHINGTON (Reuters) - The White House on Thursday threatened to veto legislation being considered by the U.S. House of Representatives that would force oil companies to give up undrilled federal leases and ban the export of crude drilled in Alaska.

The bill, which the House was to vote on later on Thursday, has a "use it or lose it" provision that requires oil companies to diligently develop their existing federal leases or turn them back to the government before they could obtain new acres to drill. "By blocking some firms from competing for new leases, this legislation would further increase gasoline prices that already exceed $4 per gallon and result in unintended consequences due to litigation," the White House said in a statement.

"Even though new leases will take years to develop, oil markets are forward-looking, and an expected decline in future supply will raise prices today," the White House said. The White House also said it opposed the bill's language banning the export of crude oil produced in Alaska. The Congress allowed exports of Alaskan oil in 1995, but virtually none of the state's crude has been shipped to other countries in the past eight years.

"Such a ban would make virtually no additional oil available to U.S. consumers, and would not lower oil prices that are set in a world market," the White House said. "At the same time, such export restrictions are detrimental to the efficient operation of global energy markets and would send the wrong signal to our trading partners who may face pressure to impose similar trade restrictions."

White House threatens to veto oil drilling legislation | Reuters

[waltky]

To drill or not to drill - that is the question...

Alaska: Energy fix meets political pandering
July 21, 2008: The country could offset some of its oil imports by drilling in Alaska, but some say the whole debate is just a big distraction.

Either we're sitting on a potential cure for high oil prices or we're wasting our time. Those seem to be the two schools of thought emerging as politicians call for expanded drilling in Alaska. It's no surprise that with oil prices at $130 a barrel, lawmakers facing angry voters want to be seen as tackling the problem head-on. And while it's hard to deny that the jackpot of all untapped domestic oil lies just north of the Arctic Circle, in Alaska's Arctic National Wildlife Refuge, it's tougher to say whether or not extracting this energy will benefit our nation in the long run.

Republicans in Congress - along with President Bush - want vast sections of the country currently off-limits to drilling opened, including the Arctic Refuge. It's not likely the refuge will be drilled any time soon - congressional watchers say proponents don't have the votes. Plus, both front-runners in the presidential race - John McCain and Barack Obama - are against it. But with oil supplies tight and worldwide demand rising, this issue emerges whenever politicians talk energy. So just what would be gained if the refuge were drilled?

Supporters say it would send a message to the oil market that the U.S. is serious about increasing domestic supplies, and bring oil prices down immediately. While the country also needs alternatives, they say more domestic production is necessary in the interim to ease the pain on drivers and help offset the huge amount of oil this country imports. "We can do the economy a lot of good by taking advantage of the resources we have," said Mike Steel, a spokesman for Rep. John Boehner (R-Ohio), who led a delegation of republican lawmakers on a tour of the refuge over the weekend. "We're going to require petroleum, the question is are we going to produce it here, or send our money overseas."

Opponents say that in addition to the environmental damage drilling may cause, there's not really that much oil there. Focusing on drilling in Alaska, they say, distracts from more meaningful solutions like conservation and alternative energy. "We need to be breaking our addiction to oil," said Jim Presswood, an energy advocate at the Natural Resources Defense Council. "What we can save by focusing on energy efficiency in our vehicles would dwarf [oil from the refuge]. That's the direction we need to be headed."

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