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The Price of Oil: Speculation, Manipulation Or a Deeply Broken System

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Much of this you may have read here before, but it is worth repeating because the dramatic distortion in oil prices over the past weeks and their potential impact on the economy is becoming acute, and nothing is being done about it.

Some two weeks ago the Federal Trade Commission announced that it will open a probe on suspected oil price-fixing. We wish them God speed. In the past fortnight the price of oil has spiked some 10 percent in spite of the countervailing realities that would ordinarily militate against the precipitous rise in price that has taken place, realities such as:
  • A vast commodity sell-off in the markets ranging from gold, to industrial metals, iron ore, extending to grains, natural gas and on.
  • Strengthening of the dollar, forever cited by 'energy experts' to explain FALLING oil prices.
  • Dimming demand for oil in China. Exactly opposite to the 'oiligopoly' forever citing growth in China's oil demand as an explanation for the spiking of oil prices.
  • Reduced consumption of oil in the United States. Americans are driving less and less, not more and more, as oil price movements would have you believe.
  • Record jump in U.S. oil production. Growth in America's oil production has grown by over one million barrels/day over the last year, the most in decades.
  • Record levels of oil inventories moderated only slightly this past week by a significant decrease in oil imports reflecting good management in reducing carrying costs of unneeded inventory and recognition that domestic oil production significantly enhances the 'national security dividend' inherent in today's inventory management.

Yes, of course there are the geopolitical concerns attendant to Egypt and the Suez Canal, which has been seized upon by the oil traders/gamblers as a pivotal rationalization for the current extraordinary spike in oil prices. Yet a clear reading on the ramifications of a Suez Canal closure is rarely, if ever, laid out.

Some 5 percent of seaborne crude oil passes through the Suez Canal. Not inconsiderable, but its potential cost can be clearly calculated. The closure of Suez would not stop the lifting and shipping of oil cargos. It would however add approximately 16 days steaming time around Cape Horn to an oil cargo's sea voyage otherwise precluded from using the canal.

In the shipping lexicon, the maximum size of an oil tanker that can transit Suez is known in the trade as a "Suezmax" class carrier. Its typical deadweight is some 240,000 tonnes. Calculating a per diem charter rate for a 'Suezmax' carrier at $50,000/day or $800,000 per voyage (actually much less as there is a massive overhang of idle tankers currently steeply depressing charter rates). Thus the additional cost of transporting a cargo of crude oil of 1.7 million barrels (240,000 tonnes x the 7.1 barrels of crude oil per tonne) around the Cape would be an additional 47 cents per barrel (1.7mm/barrels divided into $800,000 per voyage cost), a far cry from the near $9.00/bbl per barrel increase in price for oil chalked up on the commodity exchanges this past fortnight. A brazen example of how the 'oiligopoly' trumpets information, real or otherwise, to delude an unsuspecting public into accepting unquestioningly outrageous, basically unwarranted movements in the price of oil and its products, gasoline, heating oil, diesel and on.

To fully appreciate the excesses of the oil market one needs to understand that some 80 percent of all contracts bought and sold on the commodity exchanges are not executed by actual producers or crude oil consumers engaged in 'legitimate' hedging strategies, but rather by speculators comme gamblers trying to drive the price of oil in the direction in which they have placed their bets.

This open chicanery has cost end consumers (those paying for these excesses at the gas pump in the billions of dollars) to the enormous profit of the gamblers, from individual players, the oil trading desks of the bank holding companies, the trading desks of many of the oil companies themselves, and the physical oil commodity trading houses speculating on their own behalf or possibly on behalf of those who have an interest in ever higher oil prices.

For reasons ranging from lack of understanding or worse, our government has been totally acquiescent to these manipulations by the 'oiligopoly. As prime example The Commodity Futures Trading Commission (CFTC) was given the authority by virtue of a January 2010 rider to the Commodity Exchange Act, to implement speculative position limits for futures and option contracts of certain energy commodities such as crude oil. To date, no action has been taken by the CFTC other than interminable hearings which one can well imagine have become a cover for the total lack of meaningful process.

In April 2011 the president amidst great fanfare, focused on 'speculation' in the oil market, giving Attorney General Eric Holder a mandate to investigate and announcing the formation of 'The Oil and Gas Price Fraud Working Group.' To date, more than two years later, not a word has been heard from this august commission.

Further the administration has been irresponsible, to the point of being supportive (please see "The Price of Gasoline and Our Patently Absurd Application of Our Sovereign Immunity Law") of sovereign immunity extended to OPEC national oil companies and the massive refining facilities owned by them in the United States, oblivious to their inexorable influence on the pricing of domestic crude oil.

The facilities include the Motiva Refinery at Port Arthur, Texas, the largest refinery in the country owned 50 percent by Saudi Arabia's national oil company and OPEC member SaudiAramco and 50 percent by Aramco's partner in their SASREF refinery in Jubail, Saudi Arabia, Royal Dutch Shell.

In addition there are the important refineries and facilities in Houston and Corpus Christie, Texas; Lamont, Illinois; Lake Charles and Chalmette Louisiana; Savannah Ga.; St.Croix and the Virgin Islands all operated by Citgo, the U.S. subsidiary of the Venezuelan national oil company PDVSA. PDVSA is a charter member of OPEC, and through Citgo's American facilities, processing more than a million barrels per day in the United States.

All told it would appear that the 'oiligopoly' has us in their grip. Yet there is a halting ray of sunshine in the announcement on June 25th that the "Federal Trade Commmission Said to Open Probe of Oil Price Fixing After EU."

Will it be a serious and searching probe of the malevolent formation of prices in the oil industry, costing American and world consumers billions, or just a cursory headline in the manner of the now discredited 'The Oil and Gas Price Fraud Working Group.' Time will tell of course, but it would be a powerful incentive if the press and public would hold the FTC and our elected officials to account.

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