12/11/2006 12:27 am ET | Updated May 25, 2011

An Energy Agenda For a Newly Energized Congress, Part IV: Need For Urgent Congressional Oversight of Oil/Gas Futures Trading

The consumption of fossil fuels given their impact on our environment is dangerous to our civilization, but perhaps no less so than the high price of oil. One of the reasons why prices have escalated exponentially over the past few years is the lack of government oversight and transparency in oil futures trading both domestically and overseas. It is essential that the new Congress comes to grips with this issue. This is not a call for lower prices to encourage greater consumption. That is another issue altogether and will be dealt with separately. Rather it is a call to bring the price of oil within the parameters of real market forces and cease the transfer of hundreds of billions to corrupt and dangerous regimes.

It has been the contention here that the price of oil has been and is being manipulated to undreamed of heights by the oil industry and its allies, a complacent government, the policies of the Organization of Petroleum Exporting Countries, the panic factor of threatened supply disruptions forever hyped by the oil patch, and the constant refrain of the peak oil scaremongers who have been predicting the end of oil since the first oil well was drilled in Pennsylvania over 100 years ago.

There has been a growing appreciation that with the trading of oil and oil product futures on the commodity exchanges and the burgeoning electronic markets, a vast new terrain has opened to orchestrate the price of oil in a global and sparsely regulated arena.

This is not a personal rant. The issue has received the attention of Sen. Carl Levin (D. Michigan) and Norm Coleman (R.Minn.) the current ranking minority and chairman of the Senate Permanent Subcommittee on Investigations as well as Senator Diane Feinstein (D. California) who are urging Congress to enact legislation that would enhance oversight on speculative trading in energy and commodity markets. Ironically it was at Enron's instigation some five years ago that the appropriately named 'Enron loophole' put limits on the oversight of Commodity Futures Trading Commission to identify and prevent inappropriate, say manipulative trading, in energy and commodity markets. Since then the price of oil has risen by some 300%. A direct correlation? Perhaps not, but certainly too much of a coincidence to be dismissed altogether.

Sen. Levin expressed himself clearly, "Right now there is no cop on the beat overseeing energy trades... Enron has already taught us how energy traders can manipulate prices... when no one is looking." Sen. Coleman weighed in and caught the issue in a nutshell. "We need to explore legislative ideas to ensure that energy prices reflect supply and demand..."

BP, the 'heroes' of Alaska, has been in the crosshairs of the CFTC of late, trying to fend off charges that it rigged prices of oil and gas futures (see "The Government Finally Takes Serious Aim at the Manipulation of Oil Prices" 9/01/06). Not a bad payoff for BP should the CFTC be on mark. Manipulating an increase of a mere dollar per barrel price increase on the commodity exchange would add $900 million to BP's annual bottom line. Good work if you can get away with it. Not to be outdone, last week the Financial Times reported that Energy Transfer Partners, the largest intrastate gas pipeline system in the US is under investigation by federal regulators over physical gas purchases and gas swap trades executed on the Intercontinental Exchange (ICE) in an attempt to influence the outcome of their swap trades.

But compared to OPEC, BP is but a bit player. The riches that would be achieved through the rigging of the futures market by only one dollar a barrel is staggering. OPEC produces near 30 million barrels/day. Multiply that by 365 days a year. You do the math. Talk about incentive to rig, and combine that with the torrent of dollars being showered on OPEC, you not only have the incentive but the means as well.

If the manipulation is closer to $10 or $20 (which is my contention, that it is not so much political risk but futures trading that is imposing a $20 premium on the price of oil)) you begin to understand the enormous transfer of wealth that is taking place and the existential risks we as a society are facing given the vast sums flowing to malign regimes, not to speak of the endless funds being made available to terrorist enterprise placing our very civilization at risk. In Iraq alone, according to the US Iraq Study Group millions upon millions of dollars have been flowing from Saudi citizens to fund the Iraqi insurgency against the government and the U.S. led coalition. Not to speak of the billions going worldwide to Wahabbi Madrassas, cultural centers and imans preaching hatred of the West. Not to speak of Iran's nuclear program. Not to speak of the murderous civil strife in the heart of Africa. Not to speak of the disequilibrium in Indonesia, Malaysia, Chechnya, and on. And next?

Not to speak of the oil companies whose bottom lines have exploded without adding an ounce of additional economic value. Riding the coattails of OPEC and hiding behind prices determined on the commodity exchanges they have been able to 'justify' their runaway profits as market driven to an all too acquiescent government and press.

And then there is OPEC. Only last week Edmund Daukoru Nigeria's oil minister and the President of OPEC declared he is "not comfortable with current prices" and further production cuts should be instituted at OPEC's December 14th meeting. This with prices touching $63 a barrel. OPEC is open about its attempts to limit supply in order to impact price. Manipulative behavior is inherent to a cartel. And why should it stop there? The pricing of oil on commodity markets gives OPEC and the oil industry the cover of 'market forces' when gouging the public. It is an invaluable public relations tool in its dealings with society at large.

Up until now the commodity markets and especially the now predominant electronic trading markets and over the counter markets are close to opaque. Anyone buying or selling who does not want to be identified can accomplish that goal easily through agents or straw men. Would it not stand to reason that OPEC and perhaps others in the oil game who are producers of crude oil along with hedge funds would be sorely tempted to rig the futures market.

If one has the means, which OPEC certainly does, it almost becomes easy given the commodity trading world's focus on chart movements and the recent phenomenon of 'black box' and 'grey box' trading- the "look no hands" method adopted by innumerable hedge funds where preprogrammed mathematically determined trading limits automatically kick off buy and/or sell orders according to price points achieved. OPEC's agents or straw men can readily identify these fault lines and trade accordingly, defending a predetermined price level in confidence that their actions will induce the hedge funds to pile in once certain chart levels are reached.

Of course to be successful the market needs be ignorant of OPEC's and the oil patch's trading objectives. That's why the scrutiny of BP's and Energy Transfer Partners' trading activities may well be the tip of the iceberg. But only if Congress seriously addresses this issue.

The need for government vigilance over the realm of oil futures trading is now urgent and absolutely necessary if the price of oil is ever to reflect true market conditions. The new Congress will be tested here to determine how beholden they are to the oil industry. The oil industry's 'K' Street lobbyists will fight tooth and nail to have this issue swept under the rug. We will soon know how determined Senators Levin, Coleman and Feinstein are to go head to head with Big Oil.