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Thursday, September 4, 2008

It's the speculators stupid!

Speculators Manipulation’s Behind Oil’s Rise

by Madis Senner

The market system is not the fair system we perceive it to be.
A Series

We are being ripped off, gouged by speculators who are exploiting global imbalances and geopolitical tensions to push up the price of oil. They have duped us into believing that oil prices are being driven by unusual circumstances—increased demand from China and India while supplies have remained stagnant and geopolitical tensions in the Middle East. While these factors have certainly helped raise the price of oil, they are not the dominant factor behind its rise. Speculation has driven energy prices higher. Large pools of speculative capital managed by commodity traders, hedge funds, brokers, trading desks of oil and financial companies that can leverage their capital into the trillions of dollars, have bilked us for hundreds of billions of dollars(Click to read analysis) . Not only have speculators personally profited by hundreds of billions of dollars but their price manipulations have created even greater windfall profits for giant oil companies and OPEC nations.

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There is a lot that the Bush administration can do immediately to reduce the price of oil. The President needs to work with Congress and develop a market based strategy for oil that has it using the futures market, as the Federal Reserve uses the capital markets, along with its strategic reserves[26]. Just knowing that the USA government has the ability to sell futures and back it up by tapping its Strategic Petroleum Reserve will shave 5-10% off the price of oil.

Congress should move ahead with a windfall profits tax on giant oil companies. Not only have the oil companies unjustly benefited from the actions of speculators in oil but they most likely were speculating along with them. Congress needs to fully investigate the use of derivatives by big oil companies. In particular they need to determine whether they played any role in the stampede of speculative buying that sent energy prices higher when Katrina hit. They need to be seriously restricted and regulated.

Congress should consider a windfall profits tax on commodity funds and hedge funds and scrutinize them closely. They along with Oil Company executives should be made to testify before Congress. For an industry more secretive than the Bush administration this would be like opening the drapes on Dracula on a bright sunny day. The American people need to see the faces of those that have been sucking them dry. Hedge fund managers, commodity traders, oil/gas traders, players in the derivatives markets need to be questioned. We need to hear them justify their eight figure bonuses and billion dollar profits while many Americans were forced to go to the pawn shop to pay for gas. Would Americans feel that they were providing a vital service and enforcing discipline on the market, or would they conclude that they were being ripped off?

Americans also need to know whose money the speculators manage. Are their conflicts of interest? Have speculator’s been used as a ploy by the oil industry?, or OPEC? Have speculators been managing money for wealthy individuals with terrorist ties? Making speculators testify would have a psychological impact that would make them a bit more cautious[27].

Longer term we need to reassess our overall energy policy. Most importantly we need to have one that treats energy as a necessity for all Americans, not a toy to make money from and make millions suffer. Oil and gas are vital commodities that no one should have monopolistic control over whether it be the physical product itself, or its price.

The price of oil and how it is hurting Americans is a problem, but it is not the biggest problem. The way speculators were able to move such a large market like oil when cartels such as OPEC could not, is very worrisome. Financial deregulation has created a very large beast (speculative investment pools) that can have its way and that we cannot control. Higher oil is painful, but it is symptomatic of a much larger problem and threat.

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A marauding gang of speculator’s has seized the day. They have moved the price of oil to levels few thought possible. Their actions have had enormous ripple affects, windfall profits for oil companies and OPEC, exasperating America’s deficit and undermining national security by financially empowering countries hostile to America. They have also caused pain to and bankrupted many Americans.

We need to take a hard look at speculators, speculative pools, derivatives markets and financial markets overall. If speculators were able to manipulate such a large and strategically vital market as oil, what else is possible?—anything and everything!

We have to hope that sky high oil prices will get America to take a hard look at its soul and ask who we are. It is time we asked ourselves if financial deregulation and free markets are in keeping with American democracy if this means we are held hostage by a mob of speculators. Clearly the rape and pillage crowd that has been an underlying force since immigrants first stepped on our shores will resist. If they prevail oil prices are only the tip of the iceberg of what is to come. Oil is a problem, but perhaps it is a problem we can overcome to make America a better place to live in.

Madis Senner, CPA. Is a former global money manager turned faith-based activist. His causes include the support of an un-justly jailed physician, Dr. Rafil Dhafir, who was convicted of breaking the sanctions against Iraq for his humanitarian aid to the country: Free Dhafir. He has written about global capital flows for the New York Times, Barrons and the IFR among others. He is an author of a book on derivatives markets Japanese Euroderivatives, Euromoney, 1990. He can be reached at Oil Speculators.


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