"I'm an old man, but I'd bet my life that if the Merc (The New York Mercantile Exchange) was not in operation, there would be ample oil at reasonable prices all over the world, without the volatility."
These were the words of Leon Hess, founder and Chairman of Hess Oil before the Senate Committee on Government Affairs on November 1st 1990. Let me repeat, 1990.
In this writer's opinion, it is a truism applicable today with bells on. Eliminating the commodity exchanges that trade oil futures among other commodities, would be the ideal solution to the massive distortions in price they facilitate and rationalize. Yet it would border on the foolhardy to expect that to happen. So one needs focus on the next best thing, bringing some measure of control to the trading of such as oil contracts on the commodity exchanges, much in the manner of President Obama's challenge yesterday calling for new limits on the size and risks taken by the nations largest banking institutions.
And that is what the Commodity Futures Trading Commission (CFTC) is now proposing regarding the trading of oil futures contracts. Chairman Gary Gensler, after many months of equivocation, is now calling for federally mandated limits on speculative trading of oil, gas and other energy futures. Action on this issue, which had been anticipated since the Fall, has been held up because of the hesitation of two commissioners and opposition from Wall Street interests (please see "Wall Street Stampedes To The Aid Of The Oil Speculators" 07.12.09).
Limiting positions held by oil traders/speculators will be decidedly helpful, yet provide only part of the answer. The world of oil trading is so far flung and so loosely regulated that the mantra of "if we are constrained here we will just move our trading offshore" is repeated incessantly as the KO argument to any and all efforts to tame the unabated speculation going on.
A first step needs be taken. Yet to effectively bring a halt to speculative excess and attempts at manipulation, a more comprehensive program needs be initiated, calling for, among others, the following changes as well:
- Much higher margin requirements (please see "The Trade That Brought100/bbl Oil Teaches Us To Be Afraid, Very Afraid" 01.07.08)
- Imposing disclosure rules on "dark pools" and over the counter/electronic trading in order to bring transparency to trades away from 'regulated' markets.
- Reporting by brokers, trading houses, bank holding companies on all positions held directly or indirectly by themselves or their overseas subsidiaries and affiliates of all oil and petroleum product trades on both domestic exchanges and exchanges offshore such as London, Hong Kong, Dubai, Singapore, where voluminous oil contracts are negotiated.
- Effective reciprocal transparency between our regulatory agencies and their counterparts overseas to assure speculation and manipulation is not simply transferred to offshore venues.
- Making the issue of reciprocal transparency an important priority of our foreign policy to assure meaningful cooperation and compliance and to bring an end to the casino mentality that has taken hold most everywhere.
- Until a level of reciprocal transparency is achieved, examining the impact of arbitrage strategies of domestic traders on the price of oil and oil products traded on offshore exchanges and how their distortive pricing impact on the domestic market can best be neutralized.
In less than a year the price of oil has more than doubled from $33 bbl last February to near $80 today. This, in spite of the fact that the world is overflowing with oil stocks. Virtually all land storage is filled to the brim necessitating or rationalizing the chartering of scores of supertankers holding millions of barrels of oil, sitting at anchor at sea for months at a time. Gasoline consumption is down significantly and two major refineries in the United States have ceased operations altogether this past year; Valero Energy Corp.'s 210,000 bbl/day facility in Delaware and Sunoco Inc. has closed its sizable Eagle Point refinery in New Jersey.
Concurrently the U.S. Energy Information Administration informs that crude oil inventories, excluding the Strategic Petroleum Reserve has risen to 331 million barrels compared to the already bumper 326 million barrels a year ago. Only last week the U.S. Department of Energy reported that U.S. Refineries scaled back utilization rates by 2.9 percent to 78.4 percent, the lowest rate sine the 1980's.
And yet the price of oil, the raw feedstock for gasoline, has more than doubled in less than a year. Clearly something is amiss in that the price of oil has left all semblance of being determined by the market forces of supply and demand. On July 8th of last year both UK Prime Minister Brown and France's President Sarkozy in a joint opinion piece (http://online.wsj.com/article/SB124700398437207969.html) voiced their deep concern over "dangerously volatile" oil prices that defies "the accepted rule of economics". Regretfully neither our Department of Energy nor the upper echelons of our government have seen fit to voice their serious concern on this matter while the CFTC has haltingly been attempting to bring the issue into the forefront.
Certainly speculation in the oil trading pits plays a role. To get to the root cause of what is happening on the commodity exchanges, who is trading and to what end and who stands to gain, nothing could be more constructive than to have the CFTC convene a Federal Oil Price Task Force. In an earlier post on Huffington ('Oil's Massive Distortion Militates The Reconvening Of The 1970's Federal Oil Price Task Force" 11.03.09) the following was set forth:
"In 1977 the then Department of Energy, under James Schlesinger created a task force to address oil pricing and compliance to then existing oil price regulations. Given the turbulent and irrational movement in oil prices in the past few years, the appointment of a government task force has become essential to determine whether oil prices as currently constituted are truly an unfettered response to market forces, or an endgame of far more devious and malign pricing strategies to maximize illegally, even criminally, the profits accruing to oil producers at the expense of the public's well being."
Given the CFTC's mandate as the government agency charged with assuring a level playing field in the world of commodity trading and particularly that of oil and oil products, they would be doing the nation, the economy, and the nation's consumers a singularly significant service by spearheading and convening such a Task Force. This would cause the scales to fall from the eyes of a brainwashed public (i.e. "its all about supply and demand"), and impose a semblance of honest dealing to the oil patch.
The transfer of hundreds of billions from the pockets of the nation's and the world's consumers to oil interests both here and abroad must come to an end and this administration can not, given all the other demands on its purse, continue to stand idly by and see billions being sucked up needlessly, risking our economic well being and our national security. Mr. Obama, you have finally taken on the banks. Now is also the time to take on the commodity pits!