Back in April I wrote a couple of articles about how rampant speculation by Koch Industries, Goldman Sachs and other big players in the energy markets has been driving up the price of oil. Immediately, a bunch of freemarket sockpuppets came out of the woodwork and infested our comments section, repeating the same invisible-hand-knows-best bullshit: Speculators are a force of good, not evil; they don’t drive up prices, but in fact help keep them low. Sounds plausible, right?
Well, a few weeks ago Senator Bernie Sanders leaked a small batch of secret energy trading data compiled by the U.S. Commodity Futures Trading Commission which showed that in the summer of 2008, when the price of oil was spiking to a record $148 per barrel, the oil commodities market was one giant speculatory cesspool dominated by the largest fraud-ridden banks, investment funds and oil companies in the world, including Goldman Sachs, JP Morgan Chase, BP and Koch Industries.
Thinkprogress’ Lee Fang recently wrote about the leaked data:
As experts from Stanford University, Rice University, the University of Massachusetts, and authorities have concluded, rampant oil speculation was the prime driver of the record high prices for crude oil three years ago.
Notably, the top speculators are noncommercial players, meaning they are companies that simply and buy and sell crude contracts with no interest in actually refining and selling the product. Each contract in the list represents 1,000 barrels of oil. The documents show the total volume of trades made on one specific day shortly before the record high price of $148 per barrel.
The data, though revealing, still does not give a complete picture of trading strategies. Speculators invest in multiple private exchanges, and trading tactics can shift from day to day. Moreover physical plays, such as buying up large quantities of actual oil and storing it on tankers or in large containers, are still largely hidden from public view.
I looked at the underlying data myself, and what it shows ain’t pretty: For instance, as far as the oil futures are concerned, speculators from financial and commodity trading outfits accounted for 65 to 80 percent of the entire market. Just the two top speculators of the bunch—Goldman Sachs and Dutch/Swiss energy trading company Vitol SA—represented 20 percent of the market, while the top five players—which included Morgan Stanley, Barclays and JP Morgan Chase—accounted for more than 30 percent of all oil trading activity. (A bit of oil speculation trivia: Vitol was the first company to buy oil from Libya’s rebels a few months back, and just made $1 billion on the gamble.)
And here’s the kicker: not only did speculators dominate the energy market, they appeared to be playing both sides of the bet—meaning that they had positioned themselves to make money on both the expansion and the popping of the oil bubble. The Wall Street Journal made this stunning admission itself in an article published last month, which they naturally buried way down in the article:
The list was drawn up amid intense scrutiny faced by the CFTC during the 2008 spike. The CFTC sought data on rapidly growing corners of the commodity markets, including private contracts negotiated “over-the-counter.”
Commodities are traditionally traded on exchanges via futures contracts, which the CFTC regulates. But the CFTC typically sees the impact of over-the-counter trades indirectly, as when a bank sells a contract and buys related futures. And banks often offset the trades internally.
Over-the-counter trading exploded in recent years amid rising investor interest in riding the wave carrying prices for oil and other commodities higher.
“We were under enormous pressure to find out what was going on,” says Jeffrey Harris, then the CFTC’s chief economist.
Wall Street was the biggest presence because banks often take one side of over-the-counter trades.
Goldman topped the list, with the equivalent of 451,997 contracts that would profit if oil rose, or “long” bets, and 419,324 contracts that would pay off if prices dropped, or “short” bets. Much of that likely represented Goldman being on the other side of client trades, according to people familiar with the matter.
You might remember that the good folks at Goldman have been known to bet “on the other side of client trades” before. Most recently, Goldman Sachs bet against crap mortgage-backed securities at the height of the real estate bubble in 2006, even as it was selling/peddling them as sure-bet investments to their clients.
SEC accuses Goldman Sachs of defrauding investors Marcy Gordon, AP Business Writer, On Friday April 16, 2010
The government on Friday accused Wall Street’s most powerful firm of fraud, saying Goldman Sachs & Co. sold mortgage investments without telling the buyers that the securities were crafted with input from a client who was betting on them to fail.
And fail they did. The securities cost investors close to $1 billion while helping Goldman client Paulson & Co., a hedge fund, capitalize on the housing bust. The Goldman executive accused of shepherding the deal allegedly boasted about the “exotic trades” he created “without necessarily understanding all of the implications of those monstrosities!!!”
The civil charges filed by the Securities and Exchange Commission are the government’s most significant legal action related to the mortgage meltdown that ignited the financial crisis and helped plunge the country into recession.
So is the Wall Street Journal saying that Goldman Sachs was doing exactly the same thing in the oil/energy futures markets as it did with CDOs and mortgage-backed securities? Was the firm helping drive the price of oil sky high and steering its investors into the market, only to simultaneously bet that the whole thing would come crashing down? It appears that may be exactly what they were doing…and Goldman wasn’t alone, either. The data clearly shows that just about all the big financial/trading houses had the same one-to-one long/short spread. And that includes Koch Industries’ commodity trading subsidiary, Koch Supply & Trading LP, which had $9.75 billion in bets riding on the price of oil going up, and $11.1 billion on it going down.
You can check out all the energy speculation data for yourself here.
While most Americans find this not just odious but bad for everyone who’s not an oil speculator, the Cato Institute’s Mark A. Calabria, director of Koch-oriented financial regulation studies, sees things another way: “Speculators deliver value and help price assets more precisely.” That’s right, they price them higher so as to extract more money from peasants like me and you.
Yasha Levine is an editor of The eXiled. You can reach him at levine [at] exiledonline.com. Want to know more? Read Yasha Levine’s previous posts on the Koch-oil speculation connection: “The Koch Brothers: Dark Lords of Derivatives” and “Koch Industries Lackeys Admit to Manipulating Oil Prices…and Gloat About It, Too.”
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