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"It is a self-fulfilling prophecy. They can invent reasons why oil prices go to $130 or $150, but history shows that these people are capable of moving markets. It is not Exxon or BP or Shell that moves the oil markets. It is the financial players. It is the Goldman Sachs, the Morgan Stanley, or the other guys. It is a shame on the government that allows them to get away with that." —Oppenheimer oil analyst Fadel Gheit, Bloomberg TV, May 25, 2011
I recently explained here how excess liquidity lent to investors by the Federal Reserve at virtually no interest—helping investors use leverage as never before—created a maelstrom of activity in the commodities market. All that cheap money has pushed oil prices much higher than actual supply and legitimate demand would dictate. Covered also was the fact that during the campaign of 2008, when oil was nearing a new high of $147 a barrel, Presidential candidates Barack Obama and Senator John McCain (R-Ariz.) knew why and promised to fix it.
Both candidates recognized what was happening in the markets and promised to repeal the Enron loophole that was created in 2000 by the Commodities Futures Modernization Act. This essentially deregulated financial products known as over-the-counter derivatives and loosened capital requirements. It allows traders to run roughshod over our economy, pocketing excessive profits and slowing the pace of recovery.
Amazingly, many continue to debate whether or not commodity traders are even responsible for today’s outrageous oil pricing. To industry professionals—among them Fadel Gheit, one of the most respected oil analysts; key members of OPEC; Rex Tillerson, chairman and chief executive of ExxonMobil; and the heads of Petronas of Malaysia and Total of France—what is taking place is obvious.
Not long after these columns were published, Gary Gensler, head of the Commodities Futures Trading Commission, slammed the commodities markets with his sharpest criticisms yet. Gensler pointed out that as of today, 88 percent of recent trades for benchmark West Texas Intermediate Crude are made solely by speculators, not by the real end-users of crude.
When speculators make 88 percent of all trades, they’re not just heavily influencing the market. They have absolute control.
Gensler went on to state that creeping control of the market was similarly occurring in food commodities. He said speculators accounted for a whopping 90 percent of recent trades for wheat on the Chicago Board of Trade. A recent column in Foreign Policy magazine concurred. The market has gone from $13 billion in total contract holdings early in the last decade to $318 billion in contracts as of July 2008 (the same month oil peaked at $147 a barrel), driving food prices up 80 percent from 2005 to 2008. Foreign Policy quoted Kendell Keith, president of the National Grain and Feed Assn., as saying: "It’s unprecedented how much investment capital we’ve seen in the commodities market."
Is it any wonder that the average American working family is holding back on consumer purchases, thereby throttling the economic recovery? Two critical monthly expenses—energy and food—keep rising, steadily draining what little disposable income consumers might otherwise be able to spend on consumer goods.
Why?
As McClatchy’s Washington Bureau pointed out in a column covering the CFTC’s announcement: "… these [commodities] markets have driven up prices to the speculators’ profits and to the punishment of the public."
While the U.S. remains focused on high and unjustified prices for oil products, the discussion in Europe has started leaning toward the record food prices that the same speculators have forced on the public. The Guardian reported on June 2 that the G20 agricultural ministers would meet in Paris on June 22 to discuss food security and how best to contain speculative activity as it pertains to pricing. A day later, the paper pointed out that the ministers were incapable of coming to any meaningful agreements as to what should be done about it.
©2011 Bloomberg L.P. All Rights Reserved.
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