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Speculators and Gasoline Prices

Obama tours Southside Virginia; there's a great debate going on about whether lowering the drinking age would reduce the tragic alcohol-related death toll at the nation's colleges and universities; a remarkable sprinter blows away two records. Then there's a little story at the bottom of WaPo's printed front page about a few speculators dominating oil contracts (and thus seriously affecting prices). That story has a clear lead in the reader comment contest this morning.

David Cho reports that the Commodity Futures Trading Commission has found that a firm named Vitol was more of a speculator, holding oil contracts as a profit-making investment rather than a means of lining up the actual delivery of fuel. In July, Cho writes, "the firm held 11 percent of all the oil contracts on the regulated New York Mercantile Exchange" and that "trading activity was concentrated in the hands of just a few speculators."

This story has outraged many readers, who suggest more regulation, call for prosecution, and support a comprehensive U.S. energy plan. There are attacks on the CFTC for not examining speculation earlier and with more vigor, and attacks on politicians who have explained high gasoline prices as the simple, inevitable result of supply and demand and who have used that explanation to push for off-shore drilling. Despite the anger, this is an unusually polite and at times informative discussion.

We'll start with TerrifiedCitizen, who wrote, "Americans who can't pay their mortgages, afford healthcare and give their kids lunch money... are no doubt relieved to hear that our regulators are 'surprised'."

TedVides said, "This piece is a good start, but Vitol is only the tip of the iceberg... This is fraud on steroids, a system of legalized corruption that is also eroding world and domestic confidence in United States financial markets."

merganser agreed, writing, "Ted is dead-on. As someone in the energy industry, I can say confidently that these leeches add no value and merely drive up (or down) the price. Same holds true in natural gas and wholesale electricity markets..."

Schweg suggested that "Perhaps this is what you get when the criteria for government employees is their position on Roe V. Wade."

Garak wrote that "This is what you get when you're dumb enough to trust the markets. Note that all these loopholes were created by Republicans: a GOP-controlled CFTC in 1991 and the GOP-controlled Congress in 2000."

Infuse said, "This is a Republican blueprint for how to help their rich and incredibly rich friends get more. The price of oil has dropped $30/barrel since these investigations began. Surprised? How many desperately poor people gave up food and medicine because of this? The news is not surprising, but still outrageous."

rhynum wrote, "This is sickening. The regulators are SURPRISED by this? It's their job to know who and what they're regulating, isn't it? So how is it that they've just now "discovered" this? Obviously they've been turning a blind eye to the truth or covering it up at the behest of the Bush administration. It's criminal..."

justjunkemail offered an ambitious program, suggesting, "...oil needs to be taken of[f] the market. Like electricity, water, air, it's a necessity of life that should be affordable to all. People... shouldn't have to sacrifice groceries just to get to work. The auto industry needs to be regulated so that it builds the most fuel efficient cars possible..."

kyoto27 said, "My oh my oh my...what a surprise. I guess we'll also learn soon that Naked Short Selling is also out of control and threatens a meltdown of Wall Street and Main Street. How sad to see the CFTC, the SEC and Congress being lead around by Seeing Eye Dogs..."

twistedreality109 wrote, "And all the politicians say it's supply and demand, the demand for obscene profits by the few, with the wink of politicians for 'campaign donations'...I believe the price of oil declined slightly, because the speculators were warned the public was catching on."

Itd345 said, "I wonder if these people sleep well at night. Must be great playing games with the lives of billions of people."

TomCastano observed that "What's also interesting is the timing of the speculation, a few months before the election to make it appear that if the republican response of drill here and now would bring the prices down. Well, the democrats did not allow passing any laws for the drill here and now but the oil price is coming down any way!..."

jfregus said, "The CFTC was not doing its job effectively and our economy was almost destroyed. Give some teeth to these regulatory agencies and start snooping for criminal violations."

kevinschmidt predicted that "... If speculators no longer expected a war with Iran, then they no longer expect supply interruptions and then no longer expect an oil rise to $300 a barrel. Look for prices to further drop to about the $3.00 level sometime before Election Day.Then, no matter who wins... oil will spike back up sometime before Thanksgiving because of renewed saber rattling..."

bdunn1 said, "...You can quibble about how he [Obama] or McCain voted on this bill or that bill, but ask yourself which party has been aligned most consistently with Wall Street and not Main Street. Which party trumpets free markets and no or minimal regulations and trickle down?..."

fridaolay proposed that "Those clever boys who manipulated the system and pulled the strings to force an increase in oil should be prosecuted for treason against the United States. The speculators' rampant greed is despicable; but I would not be surprised if all this oil speculation was done with Bush and Cheney's blessings..."

dmyers412 wrote, "I suspected the manipulation that CFTC allowed; I did not suspect that the CFTC was going to continue to allow it. I'd bet there are some pretty big players in government making quite a killing on oil."

Neal3 said, "While I don't want to minimize the importance of this report, [Rep.] John Dingell [D-Mich.] who is is more responsible for the rise in oil prices than these speculators. He is largely responsible for keeping fuel economy standards low for years..."

hz9604 wrote, "If this country had an energy plan for the next 20-30 years, you would not see this level of speculation. The speculation is facilitated by the uncertainty. I do agree with the need for regulation... However I'm also sick of the Bush-Cheney conspiracy theories that seem to be the explanation for everything that ignorant people can't understand."

ronjaboy was one of the few defenders, writing, "Save your Vitrol(sic), so far from what I read everything they did was legal and benefited not only themselves but also pension funds, so Americans who have, or expect, a pension or hold mutual funds also benefited... Futures and hedging are necessary for companies to mitigate risk so there's nothing inherently wrong with it..."

And UncleWillie said, "It still boils down to supply and demand regardless of the middlemen involved."

Beacon2 suggested, "Lend them more money at 2% and blame the cost of energy on the liberals."

We'll close with the kind of comment we don't get very often. jhbyer wrote, "Thank you, Mr. Cho, and WaPo, too, for this investigative report."

All comments on this article are here.

By Doug Feaver  |  August 21, 2008; 7:38 AM ET
Categories:  Gasoline , Oil  
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THE RAILROAD COMMISSION OF TEXAS ended the free market for oil in the USA and the World on December 16, 1836. This was the first oil cartel sponsored by government and big business to control oil market pricing and demand! OPEC is a direct model of this cartel. With this history of government and big business controling oil, the new ICE and Nymex merger is just a long line of "ENRON" type manipulation of the "FREE MARKET" for energy markets. Run a Google search on oil futures speculation in the news today and very little will pop up! I wonder why? Thank you Washington Post for your article!

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Posted by: Joe | August 22, 2008 7:32 AM | Report abuse

Baloney to John B. Futures and hedging are for the companies that actually use the product. It used to be you could not trade unless this was so. Then the rules were changed. How do we benefit by letting a hedge fund with Billions of dollars, that then leverages this tenfold at ridculously low rates, control millions of barrels of oil that it can't use ? By inserting another middle man looking for profit the price rises. It has been said that this process in many comodities is causing the price to rise. Too many dollars chasing a finite resource does this. Of course it has also been said that a large chunk of Wall Streets profits are now dependent on this. They have undue influnce and the rest of us are screwed. Let's try to eliminate this for a year and see the impact on prices. If they don't moderate then we can resume the practice.

Posted by: Falmouth | August 22, 2008 6:16 AM | Report abuse

Watch which groups,candidates and which political party defends these speculators and you'll see who has a vested interest in seeing oil prices soar and things continue just as it has.
I read a nice defence in The Heritage Foundation Site. Now which party do they tend to side with?

Posted by: Brollens | August 22, 2008 12:12 AM | Report abuse

This high oil price is a political conspiracy by Republican Oil Speculators rather than supply & demand. ICE, WTI, Goldman Sachs, JP Morgan, CFTC & Treasury Secretary of State & the 2 oil men belong to the same gang. It is totally out of control. is this FREE MARKET? Is this Economics that the 2 oil men refer to?
American people are being kinapped by those selfish & greedy special interests.

Posted by: EconomyBlackHole | August 21, 2008 3:50 PM | Report abuse

What we are seeing now is the usual witch hunt, the need for a scapegoat. What is speculation? It is a guess, a bet. But the "market" is the "market" and is governed only by the fundamentals of supply and demand. The "speculators" in question are predicting the future supply / demand situation (usually with considerable accuracy, as it based on intelligence and market data available in the public domain) and applying it ahead of the actual supply/demand curve. This is not betting or guessing, it is forecasting, not speculation. Obviously this is to gain an advantage, but if the "speculators" didnt use this method (and it does end up in pension funds as metioned in an earlier post), the fundamentals would still exist, the same price hikes / falls would come about. The only difference would be, that the gains would be in the producers pockets.

In 1972 there were no futures markets and we had the Price shock due to the Arab israeli war and the subsequent oil embargo. In this case, the cause was obvious. It was easy to see who was responsible for the pain. Now that the direct causes are not individually identifiable, we are looking for entities (whether companies or governments) to blame. the fact is their are many, and they are all the part of the fundamental of supply and demand.

At the end of the day, the cash flows between producer and end user will be the same. How the margins within those cashflows are distributed with in a specific timeframe is the only variable. In times when demand exceeds supply, the end user hurts. The converse is also true.

Blame this and other government energy and foreign policy decisions over the last twenty years. Not the "Speculators".

Posted by: John Browne | August 21, 2008 2:09 PM | Report abuse

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