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Energy prices manipulated: millions to go without heating assistance

By       Message M. Davis     Permalink
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Newswires report that, "The government's Low Income Home Energy Assistance Program, known as LIHEAP, only has enough funding to cover 16 percent of the 38 million poor households eligible for the program." This means that seven out of ten families who apply for heating assistance this year may be turned away.

Combine the upcoming misery on part of much of the nation's poor this winter, with the end results of energy stocks manipulation, futures and investment funds financial shenanigans, and you have a recipe for disaster. For in this day of electronic trading and gazillion dollar investment funds, a single energy commodities trader or investment fund has the potential to derail and unduly influence the entire market, as evidenced by Enron and a host of mini-debacles, which continue to plague the energy industry.

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The under-funding of the LIHEAP Program, together with the possible manipulation of the energy futures market may be devastating for both low-income and middle class families alike, this year. If 70% of low income families will not be able to participate in LIHEAP, and energy prices race out of control, low income and middle class families are in for a hard winter, which is unfortunate, because a lot of the so-called "price increases" are artificially generated by a select group of investors called "futures traders."

Simply put: the future of your energy prices depends on who trades what, and how those trades are made. The manager of a single institutional fund has control over millions of dollars in investment funds, and with the "weight" of these huge investments, comes influence. Hence, the price we pay for natural gas, corn, or oil often depends on the activity of one or more singularly traders, backed by the weight of their investment houses, and, whose . The future's traders trade on what energy will sell for in the future, and by their very trading activity, they affect the outcome of the market.

According to the Washington Post:

One year ago, a 32-year-old trader at a giant hedge fund named Amaranth held huge sway over the price the country paid for natural gas. Trading on unregulated commodity exchanges, he made risky bets that led to the fund's collapse -- and, according to a congressional investigation, higher gas bills for homeowners. (David Cho, Washington Post, October 21, 2007)

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According to a Forbes subsidiary: a hedge fund is basically:

An aggressively managed portfolio of investments that uses advanced investment strategies such as leverage, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark). (Investopedia)

It is the "aggressiveness" of the strategies, which often is at the root of the rapid rise in energy prices, a price increase, which cause problems for consumers down the road. While investors, particularly fund managers who manage large funds bounce around the market like popcorn on steroids, the chaos and destruction, which they leave in their wake has manifested itself into monstrous increases in fuel supplies, in one scenario, and the legal "death" of a corporation-Enron.

Hence, in the course of buying low, selling high and leaving blood on trading floor, the administrators of these aggressively managed investment portfolios often rip through the industries with all of the finesse of a starving shark, and consumers pay the price in more ways than one-Can we say Enron?

And, before some of you get your drawers in a wad, yes, Enron was a singularity of unique proportions, but the tools which it allegedly used to manipulate the energy market were not created out of thin air by some arcane investment trick meister. Those tools, including so-called "Aggressive Accounting" practices.

In the "energy universe", Enron was a giant black hole, whose every action yielded often-deadly reactions in Consumer World-collapse of the company, destruction of retirement plans and the scrambling of the California energy markets. All of these results impacted consumers at the wallet level, with some after effects still wafting through the economy.

Congress has taken steps to slap some hands; courts have sent a few behinds to prison, but the power of large-scale investors and brokerage houses remains a terrifying thing to behold. This is particularly so if you are a consumer whose utility bills and fuel prices are out of your control and consume an ever-increasing amount of your paycheck.

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As background, according to a Senate Committee hearing on the Enron collapse:

While the stock markets provide a means of capital formation, a way for new and existing businesses to raise funds, the futures markets provide producers, distributors, and users of commodities with a means to manage their exposure to commodity price risk. Historically, commodity futures and options were traded on agricultural products. And while contracts based on agricultural products are traded as actively today as ever, a great many futures contracts are now based on non-agricultural physical commodities like precious metals or energy products and on financial commodities like interest rates, foreign currencies, or stock market indices. (my emphasis) Because they serve the risk management needs of businesses in virtually every sector of the economy, the volume of trading in these financials and non-agricultural physicals is now nine times that in agricultural contracts. While farmers and ranchers continue to use futures contracts to effectively lock in the prices for their crops and herds months before they come to market, manufacturers now can also use futures contracts to plan their raw material costs and to reduce uncertainty over the prices they receive for finished products sold overseas. (January, 2002)

Managing risk has devolved into price manipulation for a select group of traders, who, according to reports, have too much power and influence over the energy commodity market. As a case in point, while institutional traders such as Enron have allegedly had their wings clipped, many small traders continue to ply their trade on the trading floor, often influencing the market on a level at variance with their position as a single trader.

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