Exaggeration? Perhaps. But there it was, the bold, front page headline blazoned on Monday's Wall Street Journal: "Traders Blamed For Oil Spike." Continuing, it states, "The Commodity Futures Trading Commission (CFTC) plans to issue a report next month suggesting that speculators played a significant role in driving wild swings in oil prices -- a reversal of an earlier CFTC position." The article goes on to explain that a contentious report issued last year by the CFTC, the nation's predominant U.S. futures market regulator, had erroneously pinned oil price swings primarily on "supply and demand" and now acknowledged that conclusion was based on "deeply flawed data." (!)
"Supply and demand." For months -- no, for years -- it has been the constant refrain, explaining away the gyrations and steep trajectory of oil prices. There has been little else from the press, other than oil flack handouts propagating this line or the endless parade of talking heads on such "expert" freighted TV boregrams as are offered by CNBC on matters oil. There's also oil industry- influenced government spokesmen and Nobel Prize laureates who should certainly have known better. And then, of course, the avalanche of oil industry propaganda trying to paper over the steep rise in oil prices.
In the face of these "received truths," the Huffington Post has been unflinching in providing a platform for another point of view, one now borne out by the CFTC itself. This was the opinion that was both highly incredulous and seriously suspicious of the so-called facts from seemingly "authoritative" sources that were forever rationalizing events to the public, as well as oil price movements glossing over the distorting and negative impact on the economy and on consumers worldwide (although brilliantly profitable to a powerful and influential few).
Over the past few years, while the mainstream media was hiding behind their comfortable and shallow reportage on such a vital issue, a series of commentaries were posted on the Huffington Post discussing the impact of speculation. To give substance to the damage done, I would like to quote from the prepared testimony paper on behalf of the Air Transport Association of America, Inc. for a public hearing before the Commodities Futures Trading Commission on July 28, 2009 by Mr. Ben Hirst, Sr. Vice President and General Counsel for Delta Airlines (testimony that in essence could be repeated thousand fold by similarly stricken industries).
Since 2005 we have seen a significant increase in the volatility of oil prices. The increase has been particularly dramatic in the last two years. From 1999 through 2004, the average annual variance between the high price of a barrel of oil for the year and the low price was about $16. From 2005 through 2008 the average annual per-barrel variance was about $52. In 2007 the variance between the high and low prices was $48 and in 2008 it was $111. Daily volatility in 2004 was generally under one dollar. In 2008, the price of a barrel of oil rose $10.75 in a single day (June 6), and daily volatility of $3 or more became the norm. The average monthly difference in prices in 2008 was over $19 per barrel. This increase in volatility has been associated with a massive increase in speculative investment in oil futures...We estimate that the speculative oil price bubble that began in mid-2007, peaked in mid 2008, and then plummeted abruptly, cost Delta $8.4 billion, compared what we would have spent on fuel if the price had remained at $60 a barrel...At least we are still in business. Other airlines without our financial reserves have not been so fortunate. Since 2007, eight airlines have ceased operations....A key responsibility of the CFTC is to ensure that prices on the futures market reflect the laws of supply and demand rather than manipulative practices or excessive speculation.
As early as January and April 2006, two posts appeared on the Huffington Post that discussed the specter of market manipulation and speculation through trading of oil futures contracts on the commodity exchanges:
Consider that the minute by minute price of oil is set on the futures markets traded on exchanges in New York, London, Dubai, Singapore, etc. and now increasingly through electronic trading. Trading is virtually unregulated and basically opaque ... and therefore lends itself to manipulation...
Taking the lead from the likes of Senator Carl Levin in 2006, who said, "Right now there is no cop on the beat overseeing energy trades," and then- Senator Norm Coleman, who argued, "We need to explore legislative ideas to ensure energy prices reflect supply and demand," posts on the responsibility and the urgent need for Congressional, CFTC, and administration action were set forth on Huffington in December 2006 and August 2008, and again in May and June 2009.
Then there was the issue of government spokesmen mouthing the Bush administration's party lines. These ranged from Treasury Secretary Hank Paulson who, on a flight to -- guess where? -- Saudi Arabia, opined in June 2008, with the price of oil barreling toward $140, "If you look at the facts, they show the price of oil is about supply and demand." On to then- Secretary of Energy Sam Bodman, forever comatose at the switch as the price of oil was catapulting, telling us the same, while oblivious to the fire alarm being sounded by Senator Byron Dorgan of the Senate's Energy and Natural Resource Committee, who said, "There is an orgy of speculation in the futures market. This is a 24-hour casino with unbelievable speculation." And finally, even our Federal Reserve Chairman Ben Bernake, addressing the Harvard graduating class in June 2008, openly dismissed the premise that rising oil prices posed the same threat to the economy as the wage price spiral in the 1970's. These words of wisdom helped ignite the then- largest one day rise in oil prices the very next day, with speculators flooding the commodity exchanges with buy orders, jumping the price of oil by $6.08/bbl and thereby continuing on its inexorable march to $147 a barrel. This turn of the screw was not without an impact on the constellation of events leading up to the demise of Lehman Brothers three months later, thereby helping to create the greatest American financial meltdown not since 1970, but rather 1930.
Of course, in stark contrast to the Huffington Post, there is the national press, perhaps best exemplified by the New York Times. As I wrote in April 2008, "Where there are arguments to be contrived and oil patch rationalizations to excuse the heist in today's oil prices, or to explain them away, leave it to the New York Times to convey the imprimatur of what once passed for serious journalism to this greatest of all con games." Even to the point of enlisting their heavy armor, Nobel Laureate Paul Krugman who instructed us, the great unwashed, in a memorable New York Times op-ed famously entitled "The So-Called Oil Bubble," later renamed for reasons best known to Mr. Krugman to "The Oil Nonbubble" (05/12/08), that the vertiginous prices back in May 2008 were not the result of runaway speculation but rather of "fundamental factors," that "there is no good evidence that prices have gotten out of line." So much for the Nobel Prize.
And so the beat goes on. Two recent pieces were posted on Huffington with comments on the current scenario. One in April 2009 that argued, "One too often loses sight of the fact that oil prices are not determined by actual trading in 'wet barrels,' but by a broadly unregulated market in virtual paper barrels on interconnected commodity exchanges around the world." The other commented on the CFTC call for greater regulation "responding to a national and international outcry that "enough is enough" and reacting to a joint letter by Prime Minister Gordon Brown of Great Britain and President Nicolas Sarkozy of France calling for "transparency and supervision of the oil futures market in order to reduce damaging speculation."
Let me close by quoting the late Leon Hess, the legendary founder of Hess Oil . Testifying before the Senate Committee on Government Affairs, holding hearings then on oil futures markets and their impact on oil pricing, he permitted himself to offer the following observation:
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 and reasonable prices all over the world, without the volatility.
That was November 1st, 1990. Let me say that again, 1990. It's a pity there was no Huffington Post at the time as well. Then perhaps all this would not have been necessary.