THE BLOG
08/26/2013 06:04 am ET | Updated Oct 26, 2013

Blatant Distortion and Manipulation of Oil Prices Laid Bare

Friday was a red letter day for the oil producers. In the space of three hours, from 9:00 a.m. to noon, the price of West Texas Intermediate (WTI) crude oil as traded on the New York Mercantile Exchange leapt from $104.30/barrel to $106.94/bbl., finally closing the day at $106.42/bbl. A staggering range for a commodity that is core to our economy with its attendant impact on further increasing the price of gasoline, heating oil and on. The press will normally trot out the usual alibis provided them by the well oiled PR Departments of the petroleum behemoths or the likes of the American Petroleum Institute. But here for once, all the long-standing shibboleths forever used to alibi the distortions in the oil market, giving phony credence to market manipulation, were not seen nor heard as they did not in the very least apply:

-Egypt did not close the Suez Canal
-Iran was not threatening passage through the Straits of Hormuz
- The dollar was not plunging
-Oil production had not peaked
-No threatening hurricanes in the Gulf of Mexico were spotted nor forecast in the days ahead
-Chinese oil imports were continuing at a steady, not at an accelerated pace
-Commercial oil inventories in the U.S. had not been decimated, and were in fact ample and near their highest levels ever
-Production of America's newly developing oil production was not retrenching but was in fact expanding unabated and increasing in North Dakota and West Texas
-Shipping on the Houston Ship Channel was not threatened by fog (yes, a reason occasionally cited)
-No sudden shortage of cargo vessels to deliver oil from offshore suppliers (actually a vast oversupply of oil tankers continues)
-and on

None of the major business dailies picked up on Friday's perverse oil trading on the exchanges. Oh yes, there was CNBC. instead of alerting its readership and listeners to the deep distortion taking place in Friday's trading, trotted out a text-book example of the erroneous information the public is being fed, blazoning: "Oil VAULTS on refinery shutdown, US oil settles above $106," pointing its readers to the shutdown of the "fluid catalytic cracking unit at Irving Oil's New Brunswick, Canada refinery" that had been using 70,000 barrels of oil a day.

Only in the oil world is such nonsense accepted as gospel whereby the less oil you consume the more expensive it becomes. Go figure. But it is exactly this silence, this misinformation, this absence of a sense of outrage that has permitted the oil nabobs to run all over us enriching themselves beyond the dreams of Croesus, all at our expense,

What transpired on Friday was a brutal movement in the price of oil to the enormous benefit of oil interests. And for no reason that can be explained by either an interruption in supply, direct nor indirect, nor significant change in demand, nor economic data supporting the move (on the contrary, earlier that day it was reported that housing sales plummeted by 13 percent).

So what is going on? Clearly the price of oil is no longer set by supply and demand, but rather the trading of oil futures (derivatives) on the commodity exchanges.

Some thirty barrels of oil are traded for every barrel produced("Policy Brief #25 United Nations Conference On Trade and Development" 09.12), a staggering differential that has converted the oil market from actual real barrels of product production and sales to a financial paper market of oil derivatives, leaving the determination of prices to those who have the vested interest and moneyed means to manipulate the trading of oil and oil product futures to their enormous benefit at the expense of the economy and the public at large.

Consider the following: Farmer Smith grows wheat. The price of his wheat is set by and large on the commodity exchanges. He would naturally like to see the price of his wheat go as high as possible. The same for farmer Jones and his corn crop. Yet neither farmer Smith nor farmer Jones has anyway near the financial wherewithal to move the commodity markets, let alone to spike the price of wheat or corn.

Yet oil trading on the commodity exchanges is a very different animal. Here we have producers, and those with a vested interest in the producers or their production (banks such as JPMorgan Chase, Goldman Sachs, Morgan Stanley, and such as the powerful Swiss trading houses as Vitol and Glencore with close ties to the oil companies, not to speak of the humongous Sovereign Wealth Funds-from Saudi Arabia, Qatar, Kuwait, Russia et al. representative of many of the oil-producing nations). The assembled wealth is enormous and its ability to move markets unquestioned but uninvestigated. One can reasonably assume it was this gathering of wealth and a focused policy to hype the price of oil that moved the markets this Friday past as well as the weeks, and months and years before.

Oh yes, back in April 2011 there was this proclamation by President Obama:
"So we're going to look at a whole range of measures -- including, by the way, making sure that my Attorney General is paying attention to potential speculation in the oil markets. I've asked him to reconstitute a task force that's examining that."

Concurrent to President Obama's proclamation the Justice Department created the "Oil and Gas Price Fraud Working Group" amidst great fanfare and from whom we have heard nada since.

This June we were similarly regaled that the Federal Trade Commission was to open a probe on oil price fixing. Far less time has elapsed, but to date nothing, no news on how probe will be constituted and who will serve on board.

The beat has been going on a long time. Back in 2010 the Commodity Futures Trading Commission (CFTC) was deputized by Congress to establish trading limits on the size of oil futures contracts being held by commodity traders. The CFTC gets an "A" for student work. They have been studying the issue ever since, with no resolution nor meaningful program in sight.

Perhaps there are the beginnings of serious change. Just these past weeks the Federal Energy Regulatory Commission (FERC) imposed a civil fine on JPMorgan of some $400 million for allegedly fleecing millions from electric utility costumers in California and the Midwest. This is now being followed by another probe initiated by the Department of Justice as to whether JPMorgan further manipulated energy markets, and in this case headed by U.S. Attorney Preet Bharara who initiated criminal charges against two JPMorgan traders involved in the 'London Whale' derivatives debacle.

Well and good. Perhaps there is some stirring but you can bet all the well-heeled and well-oiled lobbyists in Washington are plying their trade on behalf of the oil industry, those affiliated with it, and the commodity exchanges who profit by the near limitless turnover of oil derivatives trading and are doing their utmost to counter any efforts at reform (viz the hopeless oversight and ineffectual policies of the CFTC, peopled with revolving door Wall Street and Commodity Exchange veterans).

In any case, it is well past time that President Obama's admonition of April 2011 were taken seriously not only by the Department of Justice, The Federal Trade Commission and FERC. Focus should also extend to the Energy Department, keeper of the 700 million plus barrels of crude oil bought and paid for by all of us, to determine how much is still really needed to be held in the Strategic Petroleum Reserve given America's growing oil production and its significant strides toward energy independence. The study should entail how releases from the SPR could best be used to counter the rabid speculation and artificially high prices in the oil market.

A further inquiry should also be made into the domestic oil trading activities of the two OPEC oil cartel member companies that own/control important refining facilities on U.S. soil, namely the Motiva Refinery at Port Arthur Texas controlled by Saudi Aramco, the largest refinery in the United States, and the refineries controlled by CITGO at Lake Charles. La., Corpus Christi, Tex. and Lamont, Ill. wholly owned by PDVSA the Venezuelan national oil company. Here are facilities in the United States whose prime objective, given their parent organizations commitment to ever higher oil prices through the OPEC cartel, can reasonably be assumed to be keeping the price of oil as high as possible (the interrelationship between the price of WTI and Brent Crude -- generally considered the international benchmark -- is significant) all the while happy to extract the highest possible toll from the American consumer in the price they pay for their downstream production of gasoline at the pump, heating oil, propane, diesel et al.

The formulation of oil prices has become one of the greatest rip-offs in history. It's time to get serious about our pockets being picked and fight back!

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