What The Financial Crisis Exposed About The Price Of Oil

For most of the past two years our nation experienced unprecedented jumps in the price of oil. Because so much of our economy is driven literally and figuratively by oil the impact was profound. Many independent truck drivers now found they couldn't afford the fuel they needed for their routes. Average families had their budgets stretched to the brink. Big businesses and small businesses as well as municipalities alike now had to factor in fuel costs prominently into their budgets. Out of this crisis came two different reactions by our political parties.

The wingnuts in the Republican party led by Newt Gingrich came up with the "brilliant" drill baby drill rhetoric to address the rising price of oil. It was their position that the price of oil was rising because of supply and demand and if we could just destroy our own ecosystems and and tourism industries by putting oil platforms up offshore and in every untouched corner of the country we could drill our way out of the problem.

In the Democratic party the rise in oil prices was seen as an opportunity to push a green agenda. The thought was and is that oil use is devastating to the environment and is a major contributor to global warming so we need to switch to alternative energies to power our vehicles and our country as well as creating new jobs that can't be outsourced. I happen to agree with that position (imagine that) but the most striking thing about the issue was how little work the mainstream media did on the question of "why" the price of oil was skyrocketing.

Well now the price of oil has plummetted back down to earth. After peaking at a price of $147 a barrel oil is now trading at about $39 a barrel and gasoline prices have followed suit now down to about $1.77 a gallon. While this is good for our country in the short term we still have had very few inquiries into why this happened. Some wingnuts are positing that just the mere thought that we will one day perhaps drill offshore led to the oil prices coming down. Wingnut Congresswoman Michele Bachmann claims she prayed the price of gas down. But the fact remains that the demand for oil has not changed significantly enough to account for the price of a barrel of oil being over $100 less today than it was a mere six months ago.

Well finally we are getting some answers from the media. 60 minutes ran a story last night about why the price of oil came down so precipitiously. As I suspected it was more about greed on Wall Street than it ever was about supply and demand. We still need to move our country to a green economy but in the meantime we are going to need to put some measures in place to regulate the speculators so that we don't have another run up in oil prices just so the very wealthy can make even more money on the backs of American consumers. Check the video.


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Excerpts from the transcript

In a five year period, Masters said the amount of money institutional investors, hedge funds, and the big Wall Street banks had placed in the commodities markets went from $13 billion to $300 billion. Last year, 27 barrels of crude were being traded every day on the New York Mercantile Exchange for every one barrel of oil that was actually being consumed in the United States.

"We talked to the largest physical trader of crude oil. And they told us that compared to the size of the investment inflows - and remember, this is the largest physical crude oil trader in the United States - they said that we are basically a flea on an elephant, that that's how big these flows were," Masters remembered.

Yet when Congress began holding hearings last summer and asked Wall Street banker Lawrence Eagles of J.P. Morgan what role excessive speculation played in rising oil prices, the answer was little to none. "We believe that high energy prices are fundamentally a result of supply and demand," he said in his testimony.

As it turns out, not even J.P. Morgan's chief global investment officer agreed with him. The same that day Eagles testified, an e-mail went out to clients saying "an enormous amount of speculation" ran up the price" and "140 dollars in July was ridiculous."

If anyone had any doubts, they were dispelled a few days after that hearing when the price of oil jumped $25 in a single day. That day was Sept. 22.

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"Did China and India suddenly have gigantic needs for new oil products in a single day? No. Everybody agrees supply-demand could not drive the price up $25, which was a record increase in the price of oil. The price of oil went from somewhere in the 60s to $147 in less than a year. And we were being told, on that run-up, 'It's supply-demand, supply-demand, supply-demand,'" Greenberger said.

A recent report out of MIT, analyzing world oil production and consumption, also concluded that the basic fundamentals of supply and demand could not have been responsible for last year's run-up in oil prices. And Michael Masters says the U.S. Department of Energy's own statistics show that if the markets had been working properly, the price of oil should have been going down, not up.

"From quarter four of '07 until the second quarter of '08 the EIA, the Energy Information Administration, said that supply went up, worldwide supply went up. And worldwide demand went down. So you have supply going up and demand going down, which generally means the price is going down," Masters told Kroft.

"And this was the period of the spike," Kroft noted.

"This was the period of the spike," Masters agreed. "So you had the largest price increase in history during a time when actual demand was going down and actual supply was going up during the same period. However, the only thing that makes sense that lifted the price was investor demand."

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Asked if there is price manipulation going on, Dan Gilligan told Kroft, "I can't say. And the reason I can't say it, is because nobody knows. Our federal regulators don't have access to the data. They don't know who holds what positions."

"Why don't they know?" Kroft asked.

"Because federal law doesn't give them the jurisdiction to find out," Gilligan said.

It's impossible to tell exactly who was buying and selling all those oil contracts because most of the trading is now conducted in secret, with no public scrutiny or government oversight. Over time, the big Wall Street banks were allowed to buy and sell as many oil contracts as they wanted for their clients, circumventing regulations intended to limit speculation. And in 2000, Congress effectively deregulated the futures market, granting exemptions for complicated derivative investments called oil swaps, as well as electronic trading on private exchanges.

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"Who was responsible for deregulating the oil future market?" Kroft asked Michael Greenberger.

"You'd have to say Enron," he replied. "This was something they desperately wanted, and they got."

Greenberger, who wanted more regulation while he was at the Commodity Futures Trading Commission, not less, says it all happened when Enron was the seventh largest corporation in the United States. "This was when Enron was riding high. And what Enron wanted, Enron got."

Asked why they wanted a deregulated market in oil futures, Greenberger said, "Because they wanted to establish their own little energy futures exchange through computerized trading. They knew that if they could get this trading engine established without the controls that had been placed on speculators, they would have the ability to drive the price of energy products in any way they wanted to take it."

"When Enron failed, we learned that Enron, and its conspirators who used their trading engine, were able to drive the price of electricity up, some say, by as much as 300 percent on the West Coast," he added.

"Is the same thing going on right now in the oil business?" Kroft asked.

"Every Enron trader, who knew how to do these manipulations, became the most valuable employee on Wall Street," Greenberger said.

So now we see that the rise in oil was tied predictably to the Conservative central tenet of deregulation and "free markets". Now the question is how many other media outlets will do any reporting on this subject? It would seem that 60 minutes has already done a lot of the leg work but I am sure there is more out there to be found. We deserve as a nation to be informed when we are being sold out in the name of greed by big business, Wall Street and the Republican party. There should no longer be a question over whether or not the oil bubble was due to speculations. Now we should be looking at ways to ensure it never happens again.

Special thanks should go to 60 minutes for finally having the courage to pull the veil back and shine light on the real reasons for the record rise in oil prices. It would have helped to have this information out before our Congressional leaders with their lack of political courage decided to let the ban on offshore drilling expire. But now hopefully President Elect Barack Obama will reinstitute the ban and instead focus on regulating the speculators who caused this mess in the first place.