Blame Goldman for high gas prices

Consumer groups are pushing the Obama administration to limit commodity speculation centered in the nation's largest investment banks.

By The Fiscal Times Apr 10, 2012 2:31PM
The Fiscal TimesBy Merrill Goozner

Democrats in Congress are preparing a volley against oil market speculators in their effort to counter charges by Republican frontrunner Mitt Romney that the Obama administration’s energy policies are to blame for skyrocketing gasoline prices.

A coalition of consumer groups, petroleum marketers and some industrial users said Thursday that legislation will be introduced in the House and Senate in the next few weeks that would slap new controls on oil futures markets. The goal is to curb the speculation that they say is driving up oil and gasoline prices and threatening to derail the economic recovery.

According to Mark Cooper, the chief economist of the Consumer Federation of America, and University of Maryland law professor Michael Greenberger, who in the late 1990s oversaw derivatives trading at the Commodity Futures Trading Commission, the proposed law would stop investment banks like Goldman Sachs and Morgan Stanley from selling oil-based commodity index funds; order an immediate Justice Department probe into oil speculation; and add 400 oversight staff to the CFTC to police oil and other futures markets.

“The American consumer is paying 75 cents more per gallon because of excessive speculation,” said Cooper. “That’s eating a hole in consumers’ pocketbooks and the U.S. economy.”

Given the U.S.’s declining dependence on foreign oil, which is a globally traded and priced commodity in any case, Democrats plan to point in coming weeks to oil speculators as a major cause of the recent run-up in prices, just as they did in 2008. During both price spikes, there was a coincident massive jump in the number of open crude oil futures contracts sold on the New York Mercantile Exchange.  Cheaper West Texas Intermediate Crude sold for about $103.21 a barrel in late trading Thursday afternoon, over $10 a barrel more than a year ago.

The recent spike clearly has nothing to do with underlying demand, which has fallen by nearly 10 percent in the past year. “Anything over $80 is certainly linked to some extent to speculation,” said James Williams, a long-time oil industry economist at WTRG Economics.

The Securities Industry and Financial Markets Association, which represents investment banks like Goldman Sachs, refused to comment for this story.

IMPACT ON THE ELECTION
With the economy showing signs of taking off and generating hundreds of thousands of private sector jobs a month, the Romney campaign in recent weeks has shifted gears to focus attention on the pain at the pump being felt by most Americans. Gasoline prices have reached $4 a gallon in many parts of the country and are now approaching levels not seen since the height of the financial crisis, when prices also temporarily soared above $4 a gallon.

Republicans on Capitol Hill blame the price run-up on the administration’s failure to open more public lands to drilling and what they say is Obama’s misguided touting of clean energy technologies. The Obama administration counters that the U.S. is producing more oil than ever, and is now a net exporter due to the president’s decision to open more lands to drilling and the industry’s new drilling technologies.

U.S. dependence on foreign oil has in fact fallen from a peak of 60 percent in 2005 to 49 percent in 2010 because of increased domestic production. Falling demand from more fuel-efficient vehicles has also contributed to falling imports. The Energy Information Agency predicts U.S. consumption of foreign-produced oil will decline to 36 percent of total supply by 2035.

HOW THE GAME WORKS
Since repeal of the Glass-Steagall Act in the late 1990s that separated traditional banking from other financial activities, investment banks have been allowed to sell exchange-traded futures funds linked to commodities. The volume of oil sold in these “synthetic” markets is now equal to 18 times daily consumption compared to 6 or 8 times daily consumption in the 1990s.

“The market functioned quite well at 8 days,” Williams said. “There were plenty of speculators to keep the market liquid.”
But before consumers grab their hatchets to go looking for a Goldman Sachs scalp, they should realize that the speculators pouring money into the commodity-based ETFs include major pension funds, hedge funds and other money managers seeking higher yields. When oil prices begin to rise because of heightened tensions with Iran or an oil workers strike in Venezuela, they buy the ETFs in hopes of making a quick killing on rising prices.

The investment bank that underwrites that contract, in turn, goes into the futures markets to offset its risk. Since there are few speculators betting the market will go down in such an environment (the buyers outnumber the sellers by a wide margin), the futures price goes even higher.

That rising price feeds back into the physical market where real people actually buy and sell oil. Oil producers look at the futures price and tell the refiners that they won’t deliver supply at the current price because they can make more money by holding onto it for another 30 days. The storage price is less than the differential, Williams explained. That immediately drives the spot price higher because the refiners need crude. The price at the pump rises right along with it.

“Anytime the future price is above the cost of storage, it will drag up the price on the spot market,” Williams said. “There actually is a connection.”

At a public hearing of the House Democratic Steering and Policy Committee Wednesday, Gene Guilford, who heads the Independent Connecticut Petroleum Marketers Association, demanded that only companies that actually use commodities – the end-users of products like oil – be allowed to participate in futures markets. A final rule on end-users under the Dodd-Frank financial reform legislation is hung up at the CFTC.

“This game of Wall Street placing bets on the direction of these products . . . should not be allowed,” the former Reagan administration Energy Department official said. “What we’re talking about here is the food that Americans buy and the energy we rely upon to run our economy.”

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17Comments
Apr 10, 2012 4:19PM
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Hallelujah....it is about time for this.  The politicians want to keept arguing about drilling in ANWAR or which solar company gets subsidies.  How about doing something about the 40% 'trader's tax' on oil.
Apr 10, 2012 7:07PM
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Chinese demand, Iran, OPEC, seasonal weather reports and so on, are not responsible for high oil and gasoline prices, which are causing the recession and could lead to a depression. The oil price is dictated by the fraudulent "round-trip" trades of the "dark pool" trading in the IntercontinentalExchange (ICE) in Atlanta. The international Big Oil/big banking cabal, or an international gang of criminals, owns ICE. Morgan Stanly and Goldman Sachs are partners in ICE. ICE operates outside of US, considers itself to be above the law and can commit fraud and law enfircement cannot do anything. The Commodity Futures Trading Commission has no jurisdiction over ICE, influenced by Big Oil. ICE's energy traders and speculators can ratchet-up the oil price anytime they feel like it, for their own profits and on the behalf of Big Oil, using "round-trip" trades. Google the "$2.5 Trillion Oil Scam - slideshare." The NYMEX has the "Dubai Loophole." and the ICE has the "London Loophole." "Paper oil" and the crude oil futures markets have to be done away with. Cash at the wellhead. Over 75% of crude oil futures trading takes place in the ICE. The NYMEX is a decoy market. ICE is a super Enron. The "Enroning" of California was a test-market for ICE. Oil is too critical a resource to be controlled and manipulated by greedy refiners, greedy speculators, greedy traders and greedy corporations. Cash on the barrelhead. To obtain a fair oil price, Senator Sanders and the Occupiers have to investigate ICE and seize immediately the trading records of ICE, before they are destroyed and end the specter of ICE and end this crime against humanity. The price of oil and gasoline is determined by those who control the crude oil futures markets and is not determind by OPEC and Saudi Aramco.
Apr 11, 2012 10:39AM
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How about if  the U.S. government were to tax the profits on these futures contracts at 50% - this would help close the budget deficit and discourage rampant speculation at the same time.....
Apr 10, 2012 7:50PM
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IF I REMEMBER CORRECTLY,THE RUN-UP OF OIL PRICES IN 2008 WAS THE FINAL NAIL

IN OUR FINANCIAL COFFIN, HOW COULD OUR GOVERNMENT BE SO ABSOLUTELY

IGNORANT AND NON-RESPONSIVE TO THIS FACT,AND NOT TAKE EXTREME ASSERTIVE

ACTION TO STOP IT BEFORE IT HAPPENED AGAIN, UNLESS OF COURSE THEY MAY ALL

HAVE SOME STAKE IN THE GROSS PROFITS?

Apr 12, 2012 9:39PM
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This is why Goldman Sachs is coming out with their big future oil predictions stating that supplies will be tighter in the coming months so they can drive up the price more. These people are scumbags feeding off the working and poor people in our country. They need to be stopped.
Apr 11, 2012 11:46PM
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GREED is what's too blame here. How much money is enough? But remember you can't take it with you when you die. Some else will fight over it.
Apr 10, 2012 7:49PM
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I think this is the trickle up theory.
Apr 16, 2012 2:48PM
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There is a very simple solution. The government has to have the guts to suspend permantly oil as a commodity and let supply and demand dictate the price. The way it was for a 120 years.
Apr 16, 2012 7:42PM
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Brent011 - you can't stop Goldman Sachs. They contributed almost 1 million $ to Obama in 2008. They've just got too much political clout!

 

 

Apr 17, 2012 5:40AM
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the only thing that is mis guided is romney, he is out for the money, but hides it in other countries, what a crook romneyis! just like  the bushs, he is after the money, they need to taxhim a lot more than they do, he isn't worth the salt that goes on your plate, he is a dirty crook!
Apr 17, 2012 6:26AM
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all I know is I voted for Obama for Hope and Change,  I will not be fooled again.. I will be voting for whoever runs against him... He has divided the country has backed the blackman forgetting the white and latino at every turn he has made racism a problem again in America, he has created class war far. The unions are running the country now, and I truly believe now he has a Socialist agenda for our country, that I strongly disagree with him. He has backed the Banks as their 42 million dollars donation to his re election has confirmed. Sorry No More Obama
No More Federal Reserve
Apr 21, 2012 12:00PM
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http://www.youtube.com/1drwatch?v=LdTo3O7E The funny reasons for gas prices
Apr 16, 2012 11:26AM
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We need more oil for lubricating out B--hole, becuse we get screwed so much.
Aug 27, 2012 3:41PM
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There needs to be some kind of change as the price of gasoline is clearly not linked to what I call the classical economics of supply and demand. Too much manipulation. Currently oil inventories are above 5 yr averages but gasoline inventories are not. We need more refineries. What do you say to that Barack?
Apr 18, 2012 6:57PM
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and the reason the tax payer is giving money to the oil companies is?????
Apr 17, 2012 10:53AM
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Oil trades in dollars and with the printing presses running at the rate they are there is only one thing that's going to happen, devaluation of the dollar.  Oil is just reflecting the actual value of the dollar.
Apr 12, 2012 12:29PM
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Who was this person who was called upon to purchase Goldman? Was his name Buffett? Isn't he so glowingly wielded as a sword by a certain president and party?
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