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Speculation Keeps Oil High | Oil Watchdog

Speculation Keeps Oil High

Sun, Feb 24, 2008 at 9:35 am

    Speculation Keeps Oil High

    The San Diego Union-Tribune
    February 24, 2008

    by Dean Calbreath

    Speculation helping keep price of oil stratospheric

    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
    get-rich-quick investments.

    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
    the market.

    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.

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