Gas Prices Nudging Down? You Can Thank Obama!

 Not long after my blog on Oil speculators playing us for fools, viz.


http://brane-space.blogspot.com/2012/04/oil-speculators-still-playing-us-for.html


President Barack Obama announced that he'd be willing to pursue tougher penalties on oil manipulators (who artificially bid up the price of gas for all of us) and thus, according to an obscure WSJ article yesterday (p. C1):


"shined a spotlight on commodities regulators who have won relatively few cases in the murky world of energy trading".


Murky world indeed! But we know that from time immemorial the green-eyeshade types, financial jocks and jag-offs have used obscure language and bullshit to conceal what they're really doing from the regulators (who often lack the same fancy educations, or at least the physics -statistics backgrounds of the quants that invent half this crap.) Thus, people - ordinary citizens- have often been left in the dust after being victimized by gamed mortgages, rigged private student loans, or even life insurance. With the losses often in the billions.


Look no further to the recent financial meltdown and the role of "credit default swaps" for the "baffle with bullshit" modus operandi.  In effect, these devices - derivatives were created by sophisticated egghead types using complex math formulas based on David X. Li’s (Gaussian copula) formula. Because of its structure and complexity, the widespread use of the Gaussian copula enabled unscrupulous parasites to load good bonds (rated AAA) with crap -junk bonds and then get away with having the whole rated "AAA".


Most of the sordid details of how it was done were revealed in the 2009 Financial Times article: 'Out of the Shadows: How Banking's Hidden System Broke Down, by Gillian Tett and Paul J. Davies. It noted the "plethora of opaque institutions and vehicles" that have emerged this past decade in American and European markets. The authors also noted how the esoteric products, namely SIVs (structured investment vehicles) and CDOs (collateralized debt obligations) were created by a second tier, hidden "banking system" which had effectively taken the loans of banks and repackaged them as these obscure products.


It was within this world of SIVs that people unwittingly purchased what they believed to be secure (AAA) bonds on good faith, which then proceeded to collapse because they were really laden with junk (BBB or lower)  and what's been called "toxic waste".


No regulator could make anything stick with these complex derivatives so no intent could be proven for wrong doing and no one was sent to jail for screwing 90 million people who placed trust in the financial investment system.


Now, with the WSJ article yesterday, we learn that days after Obama's warning the Commodities Futures Trading Commission came down on Optiver Holding BV, which the CFTC asserted was responsible for manipulating the price of oil on the futures markets, helping to add extra cost to all of us.


As the Director of the CFTC's Division of Enforcement, David Meister put it as he announced a $14 million penalty (ibid.):


"The CFTC will not tolerate traders who try to gain an unlawful advantage"


The method imputed to the Optiver bunch (who somehow managed to dredge up enough BS and obscure horse pockey to get the charge reduced to "recklessness" (i.e. no manifest intent) ?


It is called "banging the close" - words which will now live in infamy whenever we as ordinary citizens suspect that gas prices are going up too fast, and for no good reason.


What is "banging the close"? According to the WSJ article, it entails


"taking big positions ahead of the close of futures trading in order to influence the day's settlement price".


In other words, it would be roughly analogous to a stock trader doing a million extra "buys" on a particular stock  using his flash trade (high frequency trading) computer just before the bell. In so doing, he'd have artificially enabled the stock's  closing price to be a lot higher than it ordinarily would have been.


The difference is that in the futures markets for oil the final price - or settlement price - doesn't just affect the immediate sellers or buyers, but everyone, who must now pay more for gas. at the pump. 


All this shows an immediate cause-effect relationship between oil speculation and rising gas prices. So, please, don't blame Obama - blame the parasites that are manipulating  the oil trades using "banging the close" and other nefarious means. Notice how the gas prices have gone down nearly 10 cents a gallon the past week since the penalty was announced? Well, duh, why do you think so? It's because the speculators now believe the CFTC has teeth not just a bark and can use them! Also, the pain inflicted may be worse than any benefits.


Obama also said on Tuesday he wants to increase the fines tenfold to a maximum of $10 million per violation and beef up the CFTC.  These are good moves, but look for the Reeps to try to block them since first, they love reckless speculators who screw the 99% so -called, and also they love it when parasites earn money off specious manipulation. Hell the Repukes do it all the time!

The Whine of the Speculators

It was Kevin Phillips, in his superb book, Arrogant Capital, who first noted that whenever an empire or nation is in decline it is speculation that takes precedence over all else and dictates its economy. Such was the case with the 16th century Dutch, as with the British at the end of the 19th century. It is as true today in the U.S.A.

The problem is that speculative enclaves are mostly hidden away from public view, so they are able to conduct their shenanigans beyond the scrutiny of the public mind. G.P. Brockway (The End of Economic Man, Harpers, 1991) has noted that before about fifty years ago one had roughly equal 'productive' and 'speculative' economies based on Main St. and Wall Street, respectively. Real productivity kept growing because real investment was made in hands-on materials, plant, research and labor. Most everyone benefited, including workers - via real (defined benefits) pensions (not '401ks') as well as higher wages, and companies that produced REAL goods.

Sometime after Reagan was canonized, in the 1980s, the speculative economy - which up until then had been kept in the background- began to take control. Much of this became possible through de-regulation, especially of the banking system. The effect was to shift enormous volumes of capital from Main Street to Wall Street.

Now, as oil prices spike to unheard of highs, attention once more has turned to the commodity "traders" .....errr....speculators. By some independent estimates, up to 30% of the current per barrel price of oil is due exclusively to speculation by institutional traders in the oil commodities market. (Alas, these institutional outfits include pension funds, who put their members future welfare and livelihoods at grave risk especially if the oil prices should crash) If Oil is $140 a barrel, that would mean that minus speculative influence it would descend to about $98 a barrel. And the current $4.10 for a gallon of gas would likely recede to $3.50 or even $3.30.

Of course, the speculators and their apologists and protectors in the media don't wish to hear this, nor do they appreciate the daylight cast upon their activities. In the last week alone, I coiunted no less than eight counter-attacks (in The Economist, The Wall Street Journal and The Financial Times) against those who sought to make speculators "scape goats". Much umbrage was taken and editorial bile spilled, but I saw little to convince me the speculators were the "angels" depicted: the "guardians" charged with controlling things in the futures markets for the public good. To which I say, 'Bah', 'Codswallop!' and 'Humbug!"

Commodities traders, like currency speculators (who drove to Thai baht down causing the Asian crisis in 1998) are a mixture of casino gambler and bipedal predatory cockroach. They don't give two squats about anything or anyone except their bottom line! Indeed, these freaks are piling into the commodities racket precisely because the stock market (their usual casino outlet) is tanking, and they can't make enough on their investments.

To the apologists for the precious little speculators and "traders", I ask you to examine this article ('Oil Above $140 on Libya Threat to Cut Output') which appeared in The Financial Times of June 27th (p. 22). The article led off:

"Oil prices rose above $140 a barrel for the first time yesterday as Libya threatened to cut its oil production and Opec's president warned that priuces could surge to $150-170 this summer"

Then two pragraphs lower (caps are my emphasis):

"TRADERS TOOK THE WARNINGS AS A GREEN LIGHT FOR BUYING AND PUSHED OIL TO A HIGH OF $140.05 a BARREL"

Note, the artricle said TRADERS (e.g. speculators) pushed oil to that high! Not oil companies, not space aliens ....not the supply and demand market, but SPECULATORS in the futures market.

This is an important point, since the speculator apologists always begin their counter rants (and insulting the intelligence of the commodities "commoners") by pointing ot that NO actual physical supplies are being diminished, moved or affected by the traders. But no one said they were!

Much like Enron's shell game in energy trading in 2000, wherein no real kilowatts were generated and moved. Rather kilowatts were shifted on paper and increased costs put on as the transactions crossed particular state lines (say from AZ to CA). In the same way, future costs of future oil are bid upon on PAPER by speculators, and these amount to something similar to an auction bid. The difference is that in the hidden commodity-energy auction, unlike an actual auction for a real barrel of oil at say, Sotheby's- every manjack pays the final bid!

So imagine this room, where dozens of speculators ("traders") are bidding on a future amount of oil. The bidding begins maybe at today's market price, say $139. Then some guy yells out: "I bid $140"! And another bozo in the back yells: "I bid $142!" And it finally ends when some clown in an Armani custom-made pinstripe suit bids "$144".

Does he purchase it? Well, only in a hyperbolic way. You see, rather than paying the full price as a real bidder must, say at Sotheby's, the oil trader has margin requirements in oil futures that are often as low as 5%. This means he need only put up 5% of the total cost of the amount bidded on! Would that all auction bidders everywhere had such a grand deal! Problem is when that oil trader leaves the "auction" room (often thousands of miles away in London at the ICE Futures Europe HQ) all of us non-participants get stuck paying his last bid price wherever we live on the planet!

At the very least, to correct this abomination, the "London loophole" needs to be closed and the same standards for margin requirements applied in NY as across the pond in London. This way, cowboy commodities traders cannot continue to wreak havoc on all of us. An excellent prescription is one now proposed by Rep. John Dingell (D, MI) forcing oil speculators to put up collateral of at least 50% of the value of the energy futures in which they trade. Heck, I'd even make it more: say 80%.

Doing this simple step, as Fadel Ghelt - managing director at Oppenheimer & Co. has noted - could bring prices down to $45 to $60 a barrel. ('Oil Speculation Draws Scrutiny' in The Wall Street Journal, June 24, p. A3) . This translates to $2.25 to $2.50 a gallon for gas.

It is high time that the high priests of the Commodities Futures Trading Commission (CFTC)crack down on the casino operator oil traders and their ilk. It is bad enough that a tanking dollar (because of pusillanimous Fed policies and fear of increasing interest rates in an election year)is causing fuel spikes, but at least we can tame the speculative excesses.

These whackos cannot be allowed to play fast and loose with our economic lives.