Over the past weeks there has been a dramatic, near inexplicable rise in the price of crude oil with direct impact on what you are paying for gasoline. The price of oil has increased over 10 percent -- that is over $10 per barrel. Considering U.S. consumption of near 20 million BBLs oil/day, it is costing the American economy some $200,000,000/day. Great for the oil industry and our politicians who have the industry's back while your pocketbook, out of which that hefty sum will be picked, doesn't lobby and makes little noise.
Of course there is the usual palaver put forward by such august authorities as the NY Times. Just days ago, the Times trotted out for us the 'round up the usual subjects' list explaining the steep jump in oil and imminent further increase in the price of gasoline rationalizing the sharp rise of West Texas Intermediate crude oil listing "export failures in Libya," "disruptions of Nigeria's pipelines," "Cushing, Okla. Stockpiles falling 2.7 million barrels" (no mention of course that it leaves 47 million barrels remaining), unrest in Egypt (no mention that if, if, the Suez canal were to close, shipping costs for oil from the Persian Gulf to Europe would increase by less than 50 cents per barrel and not the more than $10/bbl booked over the past few weeks (please see "The Price of Oil: Speculation, Manipulation Or a Deeply Broken System" from July 8, 2013).
No mention, no hint that the game may be rigged and that the oil industry and the commodity exchanges are taking us down the garden path, with a corrupt system that has left all vestige of fair play and market forces that reflect true conditions of supply and demand. Even our government and its slumbering agencies are beginning to wake up to the fact that the game, as played is broken, if not already completely rigged.
Just days ago, barely reported in the business press (neither in the Wall Street Journal nor that paragon of oligopoly palaver, the New York Times) we were informed that the Federal Trade Commission (FTC) has opened a probe on oil price-fixing. Will it result in anything meaningful? Time will tell. Previous initiatives by other government agencies have gone nowhere while our Wall Street riddled CFTC is still studying "position limits" of exchange traded derivatives now more than three years after passage of the 2010 amendment to the Commodities Exchange Act of 1936 authorizing the CFTC to implement speculative position limits for futures and options contracts in certain energy commodities to prevent excessive speculation. That speculative/trading positions on the exchanges are some 30 times greater than physical product seems to have escaped them either through baleful ignorance or worse.
We are also being told that it is in the normal order of things that West Texas Intermediate (WTI) crude is increasing in value toward levels approaching that of Brent Crude. Really? The United States is awash in oil with inventory levels a hair from all time highs, and domestic production forever increasing, while imports of offshore oil to refiners without affiliation to offshore producers are decreasing dramatically (excepting Saudi Arabia's Motiva Refinery in Texas and Venezuela's PDVSA owned Citgo refineries).
Why the compulsion to align the price of WTI to Brent Crude? And in whose interest? Clearly that of the oil exporters, OPEC, the Russians, et al. For them the most frightening market in the world today is the U.S. market for natural gas and its price, which at $3.60 MMBtu thereby selling at less than one-third the price of natural gas in offshore markets. This differential is beginning to have an enormous impact on major international gas exporters such as Russia's Gazprom. Because of our self-reliance in natural gas, and as we do not currently have the capability of exporting gas by sea which is traded as Liquefied Natural Gas (LNG), our natural gas market is a wholly domestic market subject to American anti-trust laws and oversight, and therefore, for once, a true reflection of supply and demand. Were OPEC and its ilk operating in the U.S. market as American or American-based oil companies, they would be hauled off in handcuffs for their illegal collusionary activities. Clearly, given the experience of American natural gas prices, any disjunction in the price of WTI to Brent is a clear threat to the current pumped up price of oil on world markets, for which 'Brent' is the leading benchmark.
All confusing? Perhaps, and perhaps not. Not if you understand the degree of manipulation to which the system lends itself. Consider the following almost unheralded egregious initiative by the U.S. Government's Department of Agriculture. On Friday the Wall Street Journal reported "USDA's Purchases Have A Bitter Taste," informing us that the U.S. Department of Agriculture bought sugar for the first time in over a decade "as the government tries to raise domestic prices. The purchases, more than 90,000 tons, are aimed at boosting sugar FUTURES which have hit a series of record lows over the past month."
Trying to influence futures prices? Impossible you say and as the oil industry would have us believe. But here we have, smoking gun in hand, our own government engaged in manipulative activities, impacting prices in the market. If we can do it through our Department of Agriculture with its limited budget, why not Saudi Arabia or Russia and others, directly or indirectly, with their sovereign wealth funds holding balances ranging in the hundreds of billions of investing and trading dollars. What is clear is the lack of clarity -- the urgent need for full transparency of trading on the Commodity Exchanges, be it oil and its downstream products, gasoline, heating oil, diesel and on, to return the Exchanges to their once heralded function of establishing true market value and unfettered price determination of supply and demand. Full transparency is essential -- who is trading, on whose account? Are they simply traders, or are they producers and consumers of the commodities being traded? The days of the Commodity Exchanges functioning as casinos should be brought to a cataclysmic halt by forceful government action serving the interests of the public's well-being and sane economic policy.
How sweet that would be!