According to an accidentally leaked email, and reported by the Wall Street Journal ("Chevron's Email 'Oops' Reveals Energy Giants Sway Over Markets" 07.17.11) less than a week ago Chevron traders held oil and product contracts of 27 million barrels of oil in the physical and derivatives markets - an amount exceeding the total daily consumption of oil in the United States by some 8 million barrels.
Yes, there is some rationale, being an oil producer and refiner to maximize or protect the price of their production. But Chevron's oil/oil product trading activities goes far beyond hedging. They, as producers are in the catbirds seat to know what is happening in the market, and as the Wall Street Journal points out that "companies' traders take advantage of their inside view of the oil market to place speculative bets..." Speculative bets that have been enormously profitable for Chevron and likely for every other oil company. For Chevron alone trading profits recorded this year through July 14 on crude oil totaled almost $100 million while fuel oil posted a trading profit of $263.9 million (makes you feel warm and cozy up there in Maine??). And on.
Taking advantage of their insider status they are supported by a regulatory system that isn't functioning (also please see "Time to Dismiss the CFTC Chairman and His Commissioners" 12.27.10). Additionally, commodity markets are not subject to the strict insider trading rules that govern equities trading. And according to the WSJ, Chevron's activities illustrate the magnitude of the company's role in setting global prices. One can multiply that by a reasonably large percentage of other producers the likes of Chevron, and probably throw in OPEC and Russian Oil players, and one begins to understand why the oil markets and oil pricing have nothing whatsoever to do with that oil industry mantra, "don't blame us, its all about supply and demand."
But don't take my word for it. Before Congressional hearings during the second week in May, the Darth Vader of all things oil, Rex Tillerson, CEO of ExxonMobil bravely informed his Congressional interlocutors that the price of oil should be no higher than $60 or $70 a barrel, attributing the difference of quoted prices at the time of some $100/bbl to speculation and trading on the commodity exchanges (please see "Are Our Leaders Hearing ExxonMobil CEO Tillerson? 05.17.11).
Regulation of trading on the commodity exchanges as mandated by the Dodd-Frank financial regulation overhaul initiative is, given the pressure brought to bear by the financial community, in total disarray ("Commodity Cop Getting Grief From All Sides" WSJ 07.19.11). According to Michael Greenberger, professor at University of Maryland and former CFTC official, "we have no governance at all in this market." He thinks it will be five years before all derivatives are fully brought into the new regulation.
Five years!? Given the current price of oil (New York Mercantile Exchange quoted at $98bbl, Brent Crude $115/bbl) at say $100/bbl and Tillerson's speculation free $60/bbl. makes a difference of $40/bbl. The U.S. alone consumes some 20 million barrels/day. In other words we are paying a $800,000,000 speculation premium a day ($40 x 20 million barrels) or $292 billion/year and $1,400,000,000,000 or in round letters, $1.4 trillion over the five years to come.
Isn't it time our government began to rein in this massive speculation? Or are the interests of the financial and oil industries just too well connected and too powerful in he halls of government to permit change. Perhaps we should be asking, when are we going to get our government back??