The sweeping farm bill that passed the Senate today and is headed for President Bush’s desk is more pork than policy, but I’m still celebrating. OilWatchdog’s most-wanted bill to curb energy speculation was tucked into the farm legislation. The measure, now almost certain to become law, will close the so-called Enron Loophole, regulating electronic and over-the-counter energy trading that helped bring us $125-a-barrel oil. Lack of regulation made oil and natural gas trading open to price manipulation, and lack of oversight made shenanigans impossible to find. Sen. Dianne Feinstein of California, who has tried to close the loophole for years, talked to the San Francisco Chronicle about the farm bill and her victory:
Feinstein said she does not
support the $2.5 million annual income limit the bill sets for cutting
off crop subsidies to farm couples but that the bill was supported by
all agriculture groups in California.
Feinstein was thrilled about a provision she added that closes what
she called the "Enron loophole" in energy trading on electronic
platforms. The new measure extends federal regulatory oversight to
electronic energy trading and requires record keeping that would end
what she called excessive speculation.
Feinstein said she has fought for the measure since California’s
electricity crisis in 2001. "This has been a long, hard road and this
is a major legislative victory," Feinstein said.
Getting a handle on unregulated, Wild West energy trading, and the resulting $125-a-barrel oil prices, won’t be fast or easy. Part of the problem is that the regulators at the Commodity Futures Trading Commission have been short on staff, funding and authority under the current administration. The Enron Loophole bill will also boost the CFTC budget, so Feinstein deserves major credit for her tenacity and wiliness in gettng the measure passed.
I had wondered about the wisdom of tucking the energy trading measure into the farm bill, and worried that it might be traded away for somebody’s pork. But the bill as a whole now has a veto-proof majority in Congress, so the Enron loophole is toast, no matter what the oil and hedge fund buddies at the White House think. For some details on what Feinstein’s measure will do, click here. And for more on OilWatchdog’s analysis of the loophole, click here.
San Ramon-based Chevron said it expects
to spend the money over a three-year period from 2007 through 2009.
Over the five years from 2002 through 2006, Chevron spent about $2
billion on alternative and renewable energy technologies.
means Chevron expects to spend an average of $833 million a year from
2007 through 2009. That’s more than double the per-year average of $400
million Chevron plunked down from 2002 through 2006 on alternative and
"Ultimately, these projects have to make
business sense and bring in profits," said Alex Yelland, a Chevron
spokesman. "We are also looking for a leadership position in these
But some critics of the oil company were not impressed by Chevron’s spending program on alternative and renewable energy.
you take it as a percentage of profit, it does not amount to much,"
said Judy Dugan, a researcher with the Oil Watchdog online site.
the average of $833 million would amount to 4.5 percent of Chevron’s
annual — and record-setting — profit of $18.69 billion in 2007. And
the average of $400 million would have equated to 2.5 percent of the
company’s profit in 2006 of $17.14 billion — also a record at that
Dugan also is skeptical because she believes Chevron might not be
spending that much money on true renewable energy sources. She is
critical because the company does not specify how much is being spent,
separately, on alternative energy and renewable energy.
"Alternative energy could be liquid fuel
from coal, or gasification projects," Dugan said. "Alternatives are
often a code word for a different way to use fossil fuels. Chevron
needs to let us know what they are doing that is really green."
said it is investing in biofuel, geothermal, solar energy and hydrogen
fuel. Chevron works closely with AC Transit on programs related to
buses powered by hydrogen fuel, as well as diesel fuels derived from
soybeans and natural gas.
Kristina Johnson, a spokeswoman for the
Sierra Club, said it is about time for Chevron and other oil companies
to spend considerable sums on alternative and renewable energy.
energy is the future and fossil fuels are an outdated energy source,"
Johnson said. "The sooner we end our addiction to oil the better. This
has been a long time coming."
Executives at Chevron also pointed
out that the company scouts for alternative and renewable energy
technologies in ways other than direct spending. Chevron owns a venture
capital arm that invests in privately held startup companies.
than a few of these fledgling firms are engaged in research and
development of renewable or alternative energy. One example is
Oakland-based BrightSource Energy Inc., which has developed new
technologies to deploy solar energy fields.
operation looks for companies that have promising emerging
technologies," Yelland said. "They do play a key role in giving us a
position in this emerging alternative energy space. If you can get in
on the ground floor of these technologies, that can give you an edge."
Avalos covers jobs, economic development, commercial real estate,
finance and oil companies. Reach him at 925-977-8477 or firstname.lastname@example.org
The same high oil prices that are taking a
bite out of the economy brought Chevron Corp. its biggest first-quarter
profit ever, a $5.17 billion record that will likely add to the public
outcry over fuel costs.
San Ramon’s Chevron reported Friday that its profit jumped nearly 10
percent compared with the same period last year, driven higher by oil
prices that smashed decades-old records and kept climbing. The
company’s sales rose 37 percent to $65.9 billion.
Chevron’s financial report capped a week in which the largest
international oil companies all announced soaring profits: $10.9
billion for Exxon Mobil, $9.08 billion for Shell and $7.6 billion for
Most of that profit came from pumping and selling crude oil, not gasoline.
As hard as it is for drivers to believe, the prices they pay at the
gas pump have not risen as far or as fast as crude oil. Chevron made $4
million refining and selling gasoline in the United States during the
first quarter, down almost 99 percent from the same period last year.
During the previous two quarters, the company actually lost money
But that fact hasn’t blunted public anger toward oil companies at a
time when gas costs an average of $3.62 per gallon nationwide and $3.92
in California. Politicians and consumer advocates seized on this week’s
profit reports to call for increasing taxes on oil companies or
revoking tax breaks they received in the past.
"President Bush and Congress must act immediately and take the
obvious steps to end the crisis that threatens not only every consumer
but our entire economy," said John Simpson, a consumer advocate with
the nonprofit group Consumer Watchdog, which frequently criticizes oil
Chevron spokesman Don Campbell said additional taxes wouldn’t lower
oil prices. He noted that the company spent $5 billion during the first
quarter on finding and developing new oil fields – almost as much money
as the company’s profit.
"Increasing taxes at a time when more supplies are needed in the
marketplace will take money away from those projects," he said. "We
think it’s bad policy."
Indeed, Chevron and all the major oil companies are struggling to
increase the amount of oil and natural gas they pump. Chevron’s
production slipped about 1.7 percent during the year’s first quarter,
in part because many of the company’s oil field development contracts
in foreign countries give those countries a greater share of the oil
whenever prices rise.
"At higher oil prices, more goes to the national oil companies,"
said Justin Perucki, an analyst with the Morningstar financial research
firm. "If you just look at the quantity it looks bad, but remember,
they’re getting more money for the barrels they do keep."
Oil prices, however, have been rising so quickly that gasoline prices haven’t quite kept up.
Drivers have been cutting back on the amount they buy, with U.S.
sales of Chevron gasoline falling 3 percent in the first quarter. That
makes it hard for the company to pass along the full increase in the
cost of crude oil. Profit margins at gasoline refineries have shriveled
as a result, falling by roughly a third on the West Coast compared with
the first quarter of 2007.
But that situation won’t last forever. Analysts say that if oil
prices stabilize, Chevron should be able to increase its profit margin
on gasoline by slowly raising gas prices, making drivers pay more than
they already do. That process will be easier if gasoline demand
increases this summer the way it usually does, as Americans drive off
Chevron also could start making bigger profits from gasoline if the
price of oil drops dramatically. But that hasn’t happened in months.
"Either gas prices will have to go up, or oil prices will have to go
down," said Philip Weiss, an analyst at Argus Research. "It’s got to be
one or the other."
|CHEVRON CORP. (San Ramon)|
E-mail David R. Baker at email@example.com.]]>
Prices at the Pump Aren’t Keeping Pace with Rising Oil
Houston-based ExxonMobil, the No.1 publicly traded oil company in the
world, rode record crude oil prices to $10.9 billion in first-quarter
earnings Thursday, despite lower production of oil.
ExxonMobil’s 17% increase in quarterly earnings from a year ago
continues a string of eye-popping earnings announcements from big oil
companies in the USA and the United Kingdom this week, including BP, up
60%; Shell, 25%; and Conoco, 17%. Chevron announces its earnings today.
"A rising tide lifted all ships," says Fadel Gheit, an oil industry
analyst at Oppenheimer. "The gains from higher oil prices more than
offset the lower production volume."
Still, Exxon’s results fell short of Wall Street expectations, and its
profit was $1 billion below the record it set in last year’s fourth
quarter. Exxon’s net income rose to $2.03 a share, while analysts had
expected $2.13 a share.
Exxon’s share price fell 3.6% to close at $89.70 in trading Thursday on the New York Stock Exchange.
As energy experts and scientists debate whether the world is running
out of oil or not, Exxon says it’s spending more on exploration.
In a statement, Exxon CEO Rex Tillerson said, "Spending on capital and
exploration projects was $5.5 billion in the first quarter, up 30% from
last year, as we continued to actively invest in projects to bring
additional crude oil, natural gas and finished products to market."
Analysts say Exxon’s lower numbers were caused by everything from the
weak U.S. dollar, which means the rest of the world is paying much less
per barrel of oil than U.S. oil companies are, to gas prices at the
pump not rising as quickly as the cost of crude oil, which squeezes
profit margins for U.S. refinery operations.
"It’s not a pretty environment to be operating in," says Justin
Perucki, an oil analyst at Morningstar, the investment research firm in
Chicago. "The U.S. is feeling the brunt of the pain."
While Exxon’s earnings may have disappointed Wall Street, record
profits by oil companies and rising fuel prices have ignited a huge
backlash from some politicians and consumer activists. They’re calling
for a windfall profits tax and other measures to rein in what they
believe to be excessive profits.
Last year, ExxonMobil’s record $41 billion in earnings was the highest
ever for a U.S. corporation. At the same time, oil prices this year
have nearly doubled from 2007, at times rising well above $100. Drivers
also are outraged over retail gas prices approaching $4 around the USA.
Consumer Watchdog, a non-profit consumer advocacy group in Santa
Monica, Calif., says record oil company profits are hurting the U.S.
economy and consumers.
"With gasoline prices topping $4 a gallon in some cities and averaging
$3.60 nationwide, nobody is surprised to see the latest string of
outrageous profits posted by Big Oil," John Simpson, consumer advocate
at Consumer Watchdog, said in a statement. "People are driving less,
but for every trip they cancel, rising prices at the pump more than
wipe out their savings."
The consumer group urged the federal government to stop buying
market-priced oil for the U.S. Strategic Petroleum Reserve, which it
contends worsens speculative trading on the crude oil futures market
and drives up prices.
"Purchases for the reserve at these record oil prices come straight
from the pockets of taxpayers," says Judy Dugan, research director at
Consumer Watchdog. "And by taking oil off the market, they fuel
Rayola Dougher, senior economic adviser at API, the trade group for the
U.S. oil and natural gas industry, says prices aren’t set by oil
companies but by the marketplace of buyers and sellers. Global oil
production in many regions is flat, while worldwide consumption rises
1.3 million barrels of oil a day, Dougher says. Unless oil supplies
increase and consumers buy less gas, prices could stay high. "The line
between supply and demand has become very, very thin," Dougher says.
Dougher concedes that while oil companies are making large profits,
they’re also spending "10 times as much bringing these products to
market and making those investments for the future."
Even with record profits, the U.S. oil industry faces steep challenges, according to Gheit and Perucki. Those include:
– Strong competition from state-backed oil giants in Russia, China and India.
– A long economic slump that could lead to higher prices for steel, energy and other refinery costs.
– Gheit says high prices have forced the oil industry and governments
to use new technology and search harder for new oil fields and other
– "Higher oil prices have unleashed a lot of resources that were not
economic before," Gheit says. "That is a blessing in disguise."
– High gas prices steer buyers from trucks.]]>
Buoyed by booming energy prices and output, Westwood-based Occidental
Petroleum Corp. said Thursday that first-quarter profit leaped 53% to
an all-time high.
Analysts predicted continuing good fortune for the company but warned
that a slowing global economy could lower demand and prices for crude
oil, which averaged $98 for the January-March quarter.
Advocacy groups complained that the rosy outlook for Occidental and
other oil companies came at a steep price: drivers’ suffering.
Judy Dugan, research director of Consumer Watchdog in Santa Monica,
said oil companies’ profits show "an industry operating in an economic
bubble with no connection to the pain its prices are causing in the
rest of the economy."
Net income for Occidental, the fourth-largest U.S. oil company, vaulted
to $1.85 billion, or $2.23 a share, from $1.21 billion, or $1.43, a
year earlier. Analysts surveyed by Thomson Financial had expected
income of $1.98 a share.
Houston-based ConocoPhillips, the third-largest U.S. oil company,
reported Thursday that first-quarter net income jumped to $4.14
billion, or $2.62 a share, from $3.55 billion, or $2.12, in the
year-earlier quarter. The company would have done even better,
executives said, if its refineries and service stations had been able
to pass along more of oil’s rapid price increase.
At Occidental, a 50% sales surge to $6.02 billion from $4.02 billion in
the year-earlier quarter suggested that 2008 could overtake 2007 as the
most successful year in the company’s history, Chief Executive Ray R.
Compared with $1.88 billion in first-quarter operating earnings last
year for its oil and gas segment, Occidental pulled in $2.89 billion
this year, offset by higher operating expenses. The company’s
production is more than 80% oil.
The total for last year’s period includes funds from a $412-million
sale of a joint venture in Russia and $109 million from legal
settlements, including a large tax payment from Ecuador over a property
The rapid run-up in oil prices over the last two months has squeezed
refiners, which have struggled to transfer skyrocketing oil costs to
consumers, Citigroup analyst Doug Leggate said.
But with no refining operation and a business model that touts
disciplined investment and aggressive international growth, Occidental
should expect smooth sailing.
"Occidental has been the most profitable company in the sector, bar
none," Leggate said. "If any company deserves this, it’s them."
Occidental’s production of oil and natural gas increased to a daily
average of 607,000 barrels of oil equivalent from 560,000 a day in the
first quarter of last year, mainly because of output from its shared
Middle East Dolphin natural gas project.
Occidental executives said they hoped to boost production to as many as
620,000 barrels a day in the second quarter, assuming oil at $100 a
barrel. The company commanded $86.75 per barrel of crude during the
quarter, up 68% from $51.67 last year.
Occidental’s shares fell $1.66, or 2%, to $82.83, on a day when most oil companies lost ground in reaction to lower oil prices.
Contact the author at: firstname.lastname@example.org
The big upside of Sen. John McCain’s proposal
today to suspend the 18.4-cent federal gasoline tax through this summer
is that it’s simple and popular: Get rid of a tax and reduce the price
of gasoline immediately. Those aren’t little points, with the prices of
oil, gasoline, diesel, natural gas and home heating oil hitting new records too fast to keep track of and stoking painful inflation. But it’s the second level of the idea where trouble starts.
Sen. McCain knows a good populist idea when he sees one. Its true
cost just won’t become visible until it’s too late to hold anyone
In California, on the other hand, drivers are really
being stiffed by the state’s percentage sales tax on gasoline
(currently 7.5%), because it rises in tandem with pump prices. This has
the effect of suppressing any action to control gasoline prices,
because the state wins when drivers suffer. Legislators should convert
the tax to a flat amount–but one reason they don’t is the impossible
two-thirds vote needed to increase any tax. It’s a failure of both
state law and political will.
Growing demand and curbs on U.S. drilling are among reasons they cite for record highs at the pump.
April 02, 2008
WASHINGTON DC — Executives from the five largest oil companies told a
House panel Tuesday that they were not responsible for record gas
prices and defended the industry’s record profits for 2007.
The oil industry is cyclical and will experience ups and downs, J.
Stephen Simon, an Exxon Mobil Corp. senior vice president, told the
House Select Committee on Energy Independence and Global Warming.
These days, he acknowledged, "we are currently in an up cycle."
Executives from Exxon Mobil, Shell Oil Co., BP America Inc., Chevron
Corp. and ConocoPhillips — which reported combined profits of $123
billion last year — shifted blame for high prices to issues outside
their control, including growth in global demand, geopolitical events,
material and labor costs, the fall in the dollar’s value and government
restrictions on U.S. oil and natural gas resources.
Some committee members said that restrictions on new oil drilling
offshore may have contributed to rising gas prices because the U.S.
consumes 25% of the world’s oil, most of which is imported.
"We have made a choice as a nation to not advantage ourselves to our own oil supply," said Rep. Candice S. Miller (R-Mich.).
Opening or improving existing areas of oil exploration could increase
supply, thus reducing prices at the pump, the panel was told.
"We need your help to open up the 85% of the outer continental shelf
that is now off-limits to environmentally responsible oil and gas
exploration and development," said Peter J. Robertson, Chevron vice
"We cannot expect other countries to expand their resource development
to meet America’s need when our government limits development at home."
The companies need to think of a better idea, said Judy Dugan, research
director for Consumer Watchdog, a Santa Monica consumer group.
"When the only idea that oil company executives can agree on for curing
our energy woes is to open up the coast of California for oil drilling,
it’s proof that Congress has to take the reins," she said in an e-mail.
"These hugely profitable companies continue to demand freedom to drill
anywhere while they give lip service, if that, to renewable energy."
Four of the five companies have invested in alternative energy, but the
executives told the panel that oil would be a part of the U.S. economy
for years to come.
"We must disavow the perception that alternative sources of energy can
quickly fix the problem," said John E. Lowe, an executive vice
president of ConocoPhillips.
Democrats grilled Simon about Exxon Mobil’s relatively low contribution
to alternative energy — $100 million of its $40-billion profit.
Simon said his company did not believe that existing technology for
alternative resources was viable and instead was focusing on using oil
Chevron and BP America were praised for the steps they had taken toward renewable energy.
"We knew we were in the carbon business and our business emits
greenhouse gases," said BP America Chairman Robert A. Malone. "Seven
years later, it’s still a problem."
Despite advances, said Shell President John D. Hofmeister, alternative energy hasn’t become commercial enough to be profitable.
However, he said, "as we move up the maturity curve, I believe we’ll make a lot of money on renewable energy."
In February, the House voted to end tax credits for the oil companies
and shift the resulting revenue to funding renewable resources such as
wind, solar and geothermal energy. President Bush has said he will veto
the bill if it gets to his desk.
The executives said the tax breaks served as an incentive for
investment in new production, and removing them would only drive gas
"The Congress is punishing five companies by name," Hofmeister said of the bill.
Contact the author at: email@example.com
Just as the oil bubble shows its first holes, the New York Times gets around to a real, meaty story on the dangers of unregulated commodity markets. It’s a story that could have made a difference in pushing Congress to do something before oil hit $90, much less $111. But reporter Diana Henriques explains the problem of poor regulation with typical NYT clarity:
The heart of commodities markets is the so-called cash market, a
“professionals only” setting where producers sell boatloads of iron
ore, tanker ships full of oil and silos full of wheat for immediate
Wrapped around that core are the commodities futures
markets. Here, hedgers and speculators trade various versions of a
derivative called a futures contract, which calls for the delivery of a
specific quantity of a commodity at a fixed price on a particular date.
[A]s the futures markets have grown, the ability of federal regulators
to police them for fraud and manipulation has been shrinking, as a
result of legislative loopholes and adverse court decisions. And
despite widespread agreement that these regulatory gaps are bad for
investors and consumers, they have not yet been repaired.
oldest of these is the so-called Enron loophole, an 11th-hour addition
to the Commodity Futures Modernization Act of 2000 that gave an
exemption to private energy-trading markets, like the one operated by
Enron before its scandalous collapse in 2001. Regulators later accused
Enron traders of using this exempt market to victimize a vast number of
utility customers by manipulating electricity prices in California.
to that loophole is a broader one for a category called exempt
commercial markets, envisioned in the 2000 law as innovative
professional markets for nonfarm commodities that did not need as much
scrutiny as public exchanges.
What lawmakers did not anticipate was that one of the exempt markets, the IntercontinentalExchange,
known as the ICE and based in Atlanta, would become a hub for trading
in a product that mirrors the natural gas futures contract trading on
the regulated New York Mercantile Exchange.
2006, traders at a hedge fund used the ICE’s look-alike contract as
part of what regulators later asserted was a scheme to manipulate
natural gas prices, again at great cost to users. The fund denied the
accusation, and civil litigation is pending.
That case persuaded
the commission that it needed more power to police these exempt
markets, at least when they help set commodity prices. But so far, it
has not received it, despite repeated requests to Congress.
attempt to close these loopholes is attached to the pending farm bill,
which is scheduled to emerge from a Congressional conference committee
next month. But this latest effort, too, faces market and industry
The courts have also curbed the commission’s reach.
In three cases since 2000, judges have interpreted federal law to
severely limit the commission’s ability to fight fraud involving both
over-the-counter markets and specious foreign currency contracts used
to victimize individual investors.
I’m happy to admit that Earth would be better off if we all hiked or biked to work, got our power from solar panels on the roof, wore parkas indoors rather than indulging in central heat and ate grains and vegetables grown organically within walking distance of home. Short of that, though, I’m flabbergasted at the perfection-or-nothing critiques against renewable fuels and now, even plug-in hybrids, popping up in the mainstream press.
Among the more recent is a story headlined "Plug-in Cars Could Actually Increase Air Pollution," appearing a couple of weeks ago in USA Today.
The story states: "About 49% of U.S. electricity is generated using coal, so in some regions a plug-in running on its batteries is nearly the equivalent of a coal-burning vehicle."
Thus is a grain of truth turned into in apocalyptic image.
The story is based on two reports, one by the National Resources Defense Council and the other by the Minnesota Pollution Control Agency.
First off, here’s the headline on the actual NRDC study:
"The Next Generation of Hybrid Cars: Plug-in Hybrids Can Help Reduce Global Warming and Slash Oil Dependency"
The small section about potential drawbacks of deriving the electric charge from coal is intended as a call for continued clean-up of coal plants, particularly to further reduce sulfur emissions, and increased use of clean power.
The Minnesota study, which is heavier on statistics and charts, derives its conclusions from studies done of coal power in the early 1990s, when coal burning was even dirtier than today. It assumes a mix of 60% coal and 40% wind and/or nuclear power (making no differentiation between the two). New power plants are increasingly powered by clean natural gas, with very low sulfur emissions. The study also compares plug-ins (PHEVs) to internal combustion engine (ICE) sedans as they will hypothetically be produced in 2020, when they will hypothetically be cleaner-running. Even so, the Minnesota study sums up:
"The following conclusions can be drawn from a vehicle-to-vehicle comparison:
• With the exception of SO2 [sulfur dioxide], emissions for both the PHEV and the HEV are lower
than emissions from the conventional ICE vehicle.
• A PHEV has marginally lower emissions for all emittants, except CO2 [carbon dioxide] and SO2 [sulfur dioxide].
• Emissions from PHEVs per mile decrease as the all-electric range increases from
20 miles to 60 miles, again with the exception of SO2.
• Emissions per mile from PHEVs are generally 30% to 60% lower than emissions
per mile for the conventional ICE vehicles."
So how did we get to equating plug-ins cars with "coal-powered vehicles"?
Some of it is the urge for an eye-popping headline. Some of it is the desire for a counterintuitive story. Some of it could be the friends of oil hard at work, bending the ears of writers.
The San Diego Union-Tribune
February 24, 2008
by Dean Calbreath
As the price of oil jumped above $100 per barrel last week, pundits
were falling over themselves to come up with explanations for the price
Maybe it was that oil-refinery explosion in Texas, they said.
Or maybe it’s because Venezuela is about to cut off oil shipments to
the United States. Or maybe it’s because OPEC is going to slash
None of those ideas passes the sniff test:
– There was a fire at a tiny refinery in Texas, but it affected
only 70,000 barrels of crude oil a day, .004 percent of the daily
production in the United States or .0008 percent of the world’s daily
consumption. That’s hardly enough to make oil rise as high as $100.74
per barrel before settling down to a still-stratospheric $98.75 at the
close of the week.
– Venezuela’s Bush-hating President Hugo Chavez did threaten an
embargo of the United States this month, but by the time oil was
nearing the $100 mark, he had already backed down, as was expected.
– The Organization of Petroleum Exporting Countries will
probably vote to trim its production at its meeting March 5, but that’s
no big news. Demand for oil typically recedes in spring, and it may
drop more than normal if the global economy slows. OPEC is simply
re-jiggering its output to make sure its supply doesn’t outstrip
Why have oil prices jumped so much?
There are solid reasons why the price of oil should be high.
There’s a finite supply of easily accessible oil, and there’s strong
and rising demand from places such as China and India.
But there seems to be no fundamental reason that prices should be this high.
"If we are going into an economic slowdown, you could make the
case that the price of oil should be in the low $80s," said Bruce Zaro,
who specializes in energy and other investments as the chief technical
strategist at Delta Global Advisors in Huntington Beach.
But considering the way oil has been trading lately, Zaro said, it’s likely that the price could rise as high as $112.
So, again, why are prices so high?
One answer: speculation.
The past dozen years have been a daisy chain of speculative
bubbles and bursts, starting with the investments in obscure foreign
currencies — such as the Thai bhat — that provoked the Asian economic
crisis of 1997 and 1998.
Now, the same folks who drove up currencies in the mid-1990s,
dot-com stocks in the late 1990s and housing prices in the early 2000s
are at work with oil and other commodities, seeking other
Each bubble has been fueled by easy money from the Federal
Reserve and other central banks. Each time a bubble pops, the bankers’
answer has been to pump more money into the economy, inflating the next
It’s hard to track exactly how much speculation is in the
market now, partly thanks to an item known as the Enron Loophole. But a
congressional study in 2006 estimated that as much as $20 in the
then-record oil price of $70 per barrel
came from speculation. If that ratio is still true, the nonspeculative
price of oil would be $70.54 instead of the current $98.75.
A sustained bubble in the price of oil can inflict major pain.
It could arguably push an already-weakened global economy into
"What’s scariest about this — and everyone knows this in their
gut — is that when you see high oil prices that are sustained for any
period of time, bad economic things tend to happen," said Charles
Langley, a gasoline specialist at San Diego’s Utility Consumers’ Action
"The last time oil got this high (in inflation-adjusted prices)
was in the early 1980s, when there was some of the worst inflation and
unemployment I’ve seen in my lifetime," Langley said.
Making matters worse, we don’t even know who these speculators
are or what motives they might have. In the past, some speculators have
been known to manipulate the market, maximizing the price of energy for
their own purposes.
In 2006, for instance, a hedge fund known as Amaranth
intentionally manipulated the natural gas futures market in order to
make money from short sales. Joseph Kelliher, a member of the Federal
Energy Regulatory Commission, found that the company’s actions "created
losses that ultimately hurt natural gas customers across the country."
Which brings us back to the Enron Loophole.
Oil speculators have been partly shielded from regulatory
oversight since 2000, when lobbyists for the now-defunct energy giant
Enron helped persuade Congress to change the way the government
regulates energy trading.
Although oil, gas and electricity are all commodities, the
Enron lobbyists successfully argued that computerized energy trading
should be exempt from federal regulations that apply to other
commodities. That opened the door to uncontrolled speculation in
In California, the effects of the loophole were immediate. With
no regulatory oversight, Enron and other energy-trading giants
manipulated the markets — creating blackouts and brownouts throughout
the state — to push electricity prices sky-high. The high prices
generated strong profits for Enron and the speculators who followed its
Enron and many of its partners in crime have long since gone belly up. But the Enron Loophole remains in effect.
That could soon change. A House and Senate conference committee
is reviewing the Close the Enron Loophole Act, a Senate initiative
spearheaded by Dianne Feinstein, D-Calif.; Carl Levin, D-Mich.; and
Olympia Snowe, R-Maine.
The act, which passed the Senate unanimously, would subject
energy traders to the same rules as other commodities traders,
including greater transparency in trading and a ceiling on the number
of contracts that one trader can hold at a time.
Traders who violate the rules would trigger a federal
investigation, aimed at ensuring that there’s no market manipulation or
excessive speculation. Theoretically, that could have helped regulators
keep Amaranth from what it was doing.
"The Enron Loophole makes it impossible for regulators to
prevent major price distortions in U.S. energy markets," Levin said.
"The result has been higher energy prices for millions of Americans…
We need to put the cop back on the
beat in all U.S. energy markets with effective tools to stop price
manipulation, excessive speculation and trading abuses."
Judy Dugan, who tracks energy issues at the Foundation for
Taxpayer and Consumer Rights in Santa Monica, estimates that the Close
the Enron Loophole Act could take $15 to $20 a barrel off the current
price of oil, as speculators who want to keep their trading secret flee
Dugan’s estimate could be overly optimistic. But with unleaded
gasoline in San Diego selling for an average of $3.31 gallon — 19
cents shy of its all-time record — anything could help.