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Oil's Massive Price Distortion Militates the Reconvening of the 1970s Federal Oil Price Task Force

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Steven Chu, our Secretary of Energy in his October 30 post on the Huffington Post "Weatherization: Saving Money by Saving Energy" focuses on the savings that can accrue to those conscious of how to reduce energy/electricity in their homes; insulation, programmable thermostats, efficient windows and the like. "I have always been an energy efficiency nut", he tells us.

He then goes on to inform about the various programs instituted by the Department of Energy to assist homeowners to weatherize homes and encourage home energy efficiency. Well and good, and as it should be.

But the Department of Energy has other mandates, and here its actions have been totaling lacking, other than continuing, in a Bush like trance, to fill the Strategic Petroleum Reserve irrespective of price nor consideration that it already holds some 750 million barrels of oil (more than Iran's total annual oil export loadings). The Department seems oblivious to the fact that in the nine months of the Obama presidency the price of oil has skyrocketed by some 150%, from $33/barrel in February to touching $80/barrel late in October. In the world of commodity trading, given the massive oversupply of oil on the market today with storage overflowing, and scores of tankers anchored at sea with hundreds of millions of barrels of oil with no place to discharge, a price for oil shading $80 a barrel can be nothing more than a willfully contrived aberration. Clearly something is amiss. (Please see "Chairman of Gazprom Predicts $100 Oil Because of Speculation. Speculation, Really?" 09.08.09)

Added to this effrontery, is a market inured by a brain washed public, helped along by a somnolent press, comatose analysts, oil industry flaks and an oil lobbyist conflated government presenting these prices as a fair reflection of a free market. Then, to add the icing on this poisoned cake is the ongoing OPEC babble by such as its President, Jose Botelho de Vasconcelos, who in an epiphany of altruistic concern was reported by Reuters/CNBC announcing that the oil ministers of OPEC will raise output "to protect the global economic recovery at a meeting in December if oil prices rise to $100 per barrel". Here we have OPEC in the guise of Santa Claus bringing Christmas goodies if we all behave.

Such is the Alice in Wonderland world that we have come to accept without serious questioning, acquiescing as we are all being taken to the cleaners. And that is the Department of Energy's job, to wake us all up to the day to day willful distortions and manipulations that are costing the consumers and the nation billions. To date, not a peep from the Department of Energy other than a most welcome focus on long term programs toward the development of alternative energy fuels. This while the national economy is bleeding billions to foreign suppliers and oil interests throughout the world, in these deeply challenged economic times. Billions that could be put to far better use at home.

Consider the enormous potential savings to America's balance sheet. Consuming around 20 million barrels of oil a day at say $80 barrel transfers $1.6 billion from American consumers into the pockets of oil interests both here and abroad. Were the price at February's level of $33/bbl the transfer of wealth would radically lower, barely $660 million/day. This would result in a saving of $940 million/day or $342 billion a year. Let me repeat, $342 billion a year. More than the "staggering" $243 billion in money alone that the war in Afghanistan has cost us, according to Sen. John Kerry's testimony to before the Senate Foreign Relations Committee only a week ago.

It is long past time that our government take seriously and study intensely how oil prices are determined in a world of OPEC, speculation, timid oversight, failing transparency, international trading platforms, vast reserves of liquidity as those of sovereign wealth funds and their equivalents who have deeply vested interest in oil prices being quoted ever higher on the world trading exchanges. The whole gamut of oil price formation needs be examined and a government commission focused on this issue is long overdue.

In 1977 the then Department of Energy under Secretary 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.

Among the issue the task force could take under review:

-To determine the role of speculation in setting oil prices

-To determine the efficacy of such oversight agencies as the Commodity Futures Trading Commission (CFTC) in monitoring the fairhandedness of trading activity on the Commodity Exchanges'

-Back in July the CFTC made bold announcements pinning much of the oil price increases on speculative trading in the commodity pits. Yet since then little has been heard from the CFTC. What was the nature of their findings that permitted them to arrive at those conclusions? (Please see "The Huffington Post Outs The Oil Price Speculators" 08.02.09)

-Have the efforts of the CFTC to expose the role of speculation been derailed by Wall Street influence and their allies in government? (Please see "Wall Street Stampedes to the Aid of the Oil Speculators" 07.12.09)

-What is the impact on the price of oil as the result of trading oil by the Bank Holding Companies such as JP Morgan Chase, Morgan Stanley, Goldman Sachs and other banks the likes of Barclays who have dedicated billions to their proprietary oil trading/speculating departments while having access to virtually cost free funding at the Fed window? And how has this diversion/use of funds impacted their lending activities as banks in a time of economic stress?

-How does arbitraging the price of oil and oil products traded on offshore exchanges impact oil prices/products being traded on American exchanges such as the NY Merc?

-How transparent are these offshore exchanges, say London, Dubai, Singapore, Hong Kong among others?

-If they are not transparent are they subject to manipulation?

-What interface exists between our regulatory agencies, say the CFTC, and these offshore exchanges?

-The OPEC countries hold vast reserves of dollars and foreign exchange. Their sovereign wealth funds are bulging in cash. Can it be determined whether they or Russia are using this massive liquidity to move the energy markets on the International Commodity Exchanges to support the price of oil and oil products, these being the commodities that are the bedrock of their economies?

-Why did Saudi Arabia suddenly and only recently drop the widely used West Texas Intermediate (WTI) oil contract as the benchmark for pricing its oil, substituting a new London based "Argus" index? Explanations offered talk about disparity in pricing. But could it be that with the potential of a more vigilant CFTC the WTI contract becomes more difficult to "influence"?

- How effective is OPEC in restraining production of oil and impacting its price?

-What political options present themselves vis a vis OPEC and if any, are they being implemented and should they be?

-What role could NOPEC legislation play in restraining OPEC's willful collusion by striking the sovereign immunity extended to OPEC members that gives them leave under American jurisprudence?

-During the Bush administration the House passed NOPEC legislation that would have permitted the Department of Justice and the Federal Trade Commission to take action against OPEC members in American courts, charging them with restraint of trade and anti trust collusion. Nothing ever came of it because President Bush threatened to veto the legislation. The issue has not been revived under the Obama presidency. Should it be?

-What benefits might accrue in our negotiating posture with OPEC,and all foreign suppliers were all imports of oil into the United States subject to an import license issued based on of country of origin. Yes, oil is fungible, but a rigorous licensing program might well be able to deal with that. Would it not send a clear signal, once and for all, that access to our market can no longer be taken for granted and begin to change our negotiating posture with foreign suppliers from being supplicants to being equals?

-Is there a role that the Strategic Petroleum Reserve (SPR) can play in keeping prices at reasonable levels, and how would that be defined?

-Should price limits be set above which the Department of Energy would stop oil purchases for the SPR?

-How can the oil industry and the media be brought to task and the public made more aware of the realities of the oil marketplace rather than being fed such endless pabulum as 'high oil prices are a response to a weak dollar' (please note the dollar has eroded by some 15% since the beginning of the year while oil has escalated near 250% since February ) It is a canard that permits such as the CEO of BP Mr. Tony Hayward to explain away in stern instruction to us all, that in recent months the "drop in the dollar is a major factor behind oil prices breaking through $75/bbl." This is but one example of the patently misleading and self serving explanations for every jump in the price of oil, blindly being mimicked ad nauseum by the media as in the New York Times ("As the Dollar Sinks Oil Skyrockets" 10.22.09) and its endless incantations on CNBC as elsewhere (also please see "A Short Tutorial On the High Price of Oil and the Falling Dollar" 10.19.07). The public should be taught to understand self serving nonsense when it is ritually presented to them as fact. What can be done to make the public more aware and thereby more alert to the distortions being visited on them by the oil interests?

- In the need to combat the existential problem of green house gases, what steps must be taken to reduce the consumption of fossil based gasoline to offset the dramatic drop in oil prices that could well result from the implementation of effective policies countering the current high and likely manipulated oil price levels?

It is essential policies need be enacted that encourage the use of alternative fuels by establishing a voucher system, or gas tax, or whatever works to keep the potentially much lower oil prices from encouraging heightened consumption of gasoline. Better that funds gathered from gasoline taxes or other programs are circulated within our economy than the billions of dollars being shipped to foreign coffers, as is currently the case.

The irresponsible acquiescence of governments here and abroad to what has become perhaps the greatest rip off of consumers since the heady days of the Standard Oil Trust need be taken in hand.The difference being that then it was blatant monopoly control, whereas today it is insidious and duplicitous manipulation by cartel producers and a combination of speculative and manipulative trading on the commodity exchanges all countenanced by acquiescent governments lulled into inaction by the influence and wealth of oil interests and their lobbyists and an irresponsibly somnolent press too often sensitive to the priorities of their advertisers before their responsibility to the public.