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Oil Price Gouging: From Enron With Love

By       Message David R. Usher     Permalink
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Remember what Enron did to California and millions of investors? It took advantage of deregulation in California, manipulating electricity prices by raiding the futures market, overscheduling power lines, and creating fears about shortages. PG&E went bankrupt because it could not raise rates to customers. [1] The whole thing unraveled, and Enron went down in flames in the biggest bankruptcy in American history.

Enron was a clumsy corporate attempt to raid a captive energy market. It was also a proving grounds testing how much monkey business a single corporation can get away with. Savvy investment firms and avaricious lawyers analyzed the Enron case – realizing they could turn a huge buck on oil futures – so long as they tacitly let oil companies constrain the oil supply without manipulating the supply directly themselves.

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Giant speculative investment funds and oil companies now make tremendous profits raiding the oil spot-market, playing seemingly separate but implicitly cooperative roles serving up the same end-effect as Enron wreaked on California. But this time, the victim is the American consumer, not energy producers and distributors.

Federal and state politicians in both parties have failed to address this “Enroning of America” because government is on the take too. Taxes rise with gasoline prices, fattening political contributions while feeding slush budgets and pork barrels at both the state and federal levels.

Oil companies grin like Howard Stern on satellite because outrageous spot market prices drive windfall profits. Record oil-company windfall profits are derived from gross internal company book-value transfers of oil products made between offshore divisions to U.S. operations – the value differential pegged to spot market prices – which also has the concurrent effect of exporting tax liabilities overseas.

Fears of global warming, fears of shortages due to weather or minor refinery disruptions, Middle-East stability, and consumption in China have turned high gasoline prices into an honorable predation in service of imaginary higher moral and political purposes.

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National Public Radio first documented this problem in its story “Analyst: Blame Investors for High Gas Prices”. [2] The story revealed a truth: “Investment banks from Morgan Stanley to Goldman Sachs are making so much money from oil futures that they've become a hot investment for all sorts of big-money players.” Ben Dell, an oil analyst and Sanford Bernstein calls it correctly, if not conservatively: “pension funds and other investors are buying oil to remove it from the market -- which can help drive up demand -- before selling it for a profit some months later”:

I think if you saw all the pension funds walk away you'd probably see a $20 drop in the crude price." [3]

Dell thinks that mass speculation will end when production capacity meets demand. This is a backwards analysis. Production capacity will never meet demand so long as mass speculation makes unproductivity immensely profitable. According to the International Monetary fund (IMF), oil companies have not invested in additional production capacity – thus intentionally maintaining record oil company profits. [4] Oil companies are negatively motivated to increase capacity in the speculatively-manipulated market because they reap tremendous profits by sitting on their thumbs.

Gouging by playing “Fear Factor”

Oil companies normally buy some spot oil futures against excess production by other oil companies to make sure they will have enough crude. In this legitimate market, there are only so many dollars chasing so many excess barrels of future oil.

Pension and other large speculative bank-owned investors discovered they could manipulate the market out of sheer size. By making huge purchases of futures, they could accelerate fears, take oil offline, drive the price up even more – and make handsome profits in just a few weeks or months. The spot market is now distorted – too many dollars chasing around the same amount spot oil. Minor fluctuations in gas prices became wide swings. The word “hurricane” is all it takes to provide cover for raiders to buy in. Over time, the constant pressure to maintain futures profits has caused steep, consistent rises in baseline crude and refined prices over the past five years.

Analyzing the roughly 566% increase of crude oil prices since 1995, [5] accompanied by a parallel rise in refined-gasoline prices, the International Monetary Fund (IMF) admits that fear is the major factor driving oil price gouging:

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“Naturally, given the tightness in the oil market and uncertainties about demand and supply, factors such as geopolitical developments, fears of potential supply disruptions, and speculation have also all played a part in price movements, but largely through their impact on expectations regarding future fundamentals.” [6]

After identifying fear as the major factor, the IMF absolved its institutional friends manipulating those fears, suggesting the effect of entry into the market by Hedge and pension funds merely adds “diversity” to the market that can “be a source of liquidity and price discovery”. [7] Read between the lines, America: the IMF just admitted that banks and pension funds are “discovering” new oil prices by flooding a brittle market with paper purchases, and laughing all the way back to the bank.

Is There Really an Oil Shortage?

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David R. Usher is President of the ACFC Missouri Coalition

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